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Economics questions - economies of scale.

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Introduction

Economics Test 1. Define and explain all Internal Economies of Scale: * Internal Economies of Scale: Are reductions in long-run average cost as the size and output of a firm increases. In other words, they are advantages that large firms have because they are large. As they grow larger in the long-run they manage to raise their output faster than the rise in their total costs. The result is lower long-run average cost. - Marketing economies - Both in buying materials and selling its finished goods a large firm is n a better position than a smaller one. In buying the products it needs, the large firm often pays less for raw materials, machinery and so on because suppliers are sure they are going to get large orders and do not want to lose a big customer. E.g. A producer of shoelaces will sell its products for �1 per packet to Nike because it has an order of 1000 packets per week. But for Adidas it will sell them �2 because it has only an order of 100 packets per week. So Nike has a lower cost per packet compare to Adidas. In selling its products, Nike can afford to pay for expensive and professionally made advertisements or employ specialist salesmen much easier than Adidas. ...read more.

Middle

E.g. The tourist areas of Famagusta and Paphos are more likely to have supply if skilled labour needed for the tourist industry than other areas. Some firms might provide training courses related to the industry and this would reduce a firm's costs of training new workers itself. - Development of Subsidiary Industries - A concentrated industry may also benefit by attracting specialist firms providing materials, components, and services for the main industry. E.g. Firms producing car components operate in areas where the car industry is concentrated. Car manufacturers can attract the firm producing car components to build a place in the same area to reduce its costs pf transporting components. 4. Define and explain all External Diseconomies of Scale: * External Diseconomies of Scale: Are increases in the long-run average costs for a firm when the industry in which the firm operates becomes too large. They have two disadvantages. - Shortages of Resources - If the industry grows too large there could be shortages in the supplies of resources used by the industry. Such resources could be skilled labour, raw materials or components. Competition between firms that need these resources leads to an increase in their price, which means an increase in the costs of the firm. ...read more.

Conclusion

6. How can firms increase their total profit? They can achieve that by raising total revenue and by lowering total costs. Average Cost is the cost per unit of output. It is equal to total cost divided by total output. 7. Using a diagram, explain how we can find the optimum size of a firm: � The optimum size of a firm is the size or output at which it can produce most efficiently and therefore at the lowest cost. At OQ the firm is enjoying Internal Economies of Scale and its average cost falls. Beyond this point, further growth would make the firm less efficient. Instead of producing with a low average cost, extra production would cause the average cost of each unit of output to rise. 8. Why do small firms still exist? - New firms - Firms do not start large. In other words. Many firms are small because they are new. Those that will be successful are expected to become large over the years. - Desire to remain in control - Sometimes owners of small firms may not want the firm to grow too large in case they lose personal control. - Lack of Finance - Small firms find it difficult to expand because they cannot raise finance. Large companies have huge retained profits and also can sell shares to the general public. Small firms can neither of these. - 1 - ...read more.

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