3.3.3 Economies and diseconomies of scale

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    a) Types of economies and diseconomies of scale
    c) Distinction between internal and external economies of scale
    Internal economies of scale:
    These occur when a firm becomes larger. Average costs of production fall as output increases.

    There are also network economies of scale. These are gained from the expansion of ecommerce. Large online shops, such as eBay, can add extra goods and customers at a very low cost, but the revenue gained from this will be significantly larger
    External economies of scale
    These occur within an industry when it gets larger
    E.g. local roads might be improved, so transport costs for the local industry will fall
    There might be more training facilities or more R&D which will also lower average costs for firms in the local area.
    Diseconomies of scale
    These occur when output passes a certain point and average costs start to increase per extra unit of output produced.

     

    Initially, average costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases.
    After the optimum level of output, where average costs are at their lowest, average costs rise due to diseconomies of scale.
    The point of lowest LRAC is the minimum efficient scale – where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised.

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