Page 37 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Macroeconomics II –The market system

Economies of scale

8.1 Introduction

Economies of scale (increasing returns to scale) are reductions in unit
average costs caused by increasing the scale of production in the long
run.

 In some industries firms must obtain a certain size in order to be competitive

 In these industries there will be a tendency for a small number of large firms, i.e.
the market will tend to be ‘highly concentrated’.

8.2 Internal economies of scale (i.e. accrue to just one firm)

 technical economies – e.g. use of robotics, specialisation

 financial economies – e.g. lower cost of borrowing, access to funds

 trading economies – e.g. bulk discounts, global advertising

 managerial economies – e.g. use of specialists

8.3 External economies of scale (i.e. obtained by all firms)

 localisation of industry – e.g. silicon valley

8.4 Diseconomies of scale

 technical diseconomies – e.g. high admin OH in large factory

 trading diseconomies – e.g. loss of flexibility due to standardisation

 managerial diseconomies – e.g. increased bureaucracy

31