will happen to output as inputs are increased in the longrun?
are able to grow in one of two ways:
- Internal growth:
this occurs when a firm expands its own sales and output.
To do this firms must employ more factors of production (CELL).
- External growth:
this occurs via mergers and takeovers
firms grow we have found that their average cost of production per unit can
fall, we call this economies of scale.
Internal economies of scale occur because of the
increase in output by the firm:
- Technical economies
- large firms are able to buy equipment that wouldn't be economical for
small firms to purchase, as it would lie idle for a majority of the time.
e.g., Tesco are able to afford electrical
point of sale (EPOS) equipment that wouldn’t be economical for a corner
shop o buy.
- Managerial economies
- Larger firms have greater scope for the specialisation of labour,
employing specialist workers to perform a relatively narrow task.
e.g., large schools can employ specialist
biology, chemistry and physics teachers, while a small school has to employ a
general science teacher.
dimensions - doubling the height and width of a building or ship etc. will
lead the volume to increase by around threefold. This means the bigger the
building or ship the lower the average cost will be.
- Marketing economies
- as a firm grows the average cost of advertising per unit will fall,
leading to lower average costs.
e.g., small firms are unable to afford
large scale advertising campaigns, while their larger competitors are able to
finance television and radio campaigns.
- Purchasing economies
- buying in bulk means that you will normally receive a discount from the
e.g., these are similar to when you go
into a supermarket and are able to buy individual items cheaper in a
- Financial economies
- larger firms are deemed to be more credit worthy, therefore they have a
better chance of being lent money and they are given a lower rate of
interest on loans
e.g., Sainsbury’s are more likely to be
able to pay back a loan than a small cornershop so a bank will charge them a
lower rate of interest to reflect this.
If the bank refuse Sainsbury’s the loan its more than likely they
will take their business elsewhere, whilst the cornershop will have fewer
banks willing to take on their risky business.
External economies of scale arise due to factors that
the firm is unable to control:
- Growth of industry -
if many firms are located in close proximity, better roads will be built
that will reduce costs. Other firms will train workers that can be
poached, thereby reducing expenditure.
- Lowering taxation -
a decrease in national insurance contributions for example would lower a
- Technology - the
introduction of a more efficient technology would lower the costs for the
firms become too large and they reach a point where the average cost per unit
begins to increase, which is called diseconomies of scale and occurs because
X-inefficiency - managing a
large organisation with many workers spread over a large area can be very
difficult, due to problems in control, co-ordination, motivation,
communication and co-operation.
The point where costs of production are at their
lowest is called the minimum efficient scale (MES).
It's possible for the MES to occur over a range of outputs for the
firm, this is shown on the diagram below.