Summary Chapter 17 Economies of scale and Diseconomies of scale

CHAPTER 17 ECONOMIES OF SCALE AND DISECONOMIES OF
SCALE
 Economies of scale (EOS) are the fall in average costs when output
expands.
 Diseconomies of scale (DEOS) are the rise in average costs when
output expands.
 Internal EOS is the cost benefits to an individual firm when it
expands.
 External EOS is the cost benefits to all the firms in the industry when
the industry expands.




MES




MES= Minimum Efficient Scale, the point where the costs start to rise
INTERNAL EOS
 Purchasing EOS- “bulk buying and discounts” Since firms buy a lot of
resources, they can negotiate better rates with the employers thus their cost
per unit falls.
 Financial EOS- banks are eager to lend money to larger firms compared to
smaller firms since larger firms are more capable of paying back than smaller
firms therefore large firms can access money more cheaply.
 Managerial EOS- larger firms are able to pay higher salaries and wages so
they attract the most skillful staff in the industry. Specialized staff is more
efficient and productive which will help to reduce average costs.
 Technical EOS- larger firms can invest in the most up-to-date and efficient
machinery possible this will help their production process to be more
productive.