Economics- Edexcel 3.3.3
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| Long run | all factors of production are variable and the scale of production can change in the long run
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| Returns to scale | the proportionality of changes in output after the amounts of all inputs in production have been changed by the same factor
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| Increasing returns to scale | when the % change in output > % change in inputs
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| Decreasing returns to scale | when the % change in output < % change in inputs
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| Constant returns to scale | when the % change in output = % change in inputs
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| Capital-labour substitution | Replacing workers with machines in a bid to increase productivity and reduce the unit cost of production
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| Economies of scale | unit cost advantages from expanding the scale of production in the long run
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| Examples of internal economies of scale | technical economies, purchasing economies, managerial economies, financial economies, risk-bearing economies, network economies
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| Network economies | networks of suppliers / customers with a low marginal cost of adding users
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| What do risk-bearing economies arise from? | product diversification and market diversification
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| Technical economies of scale | gains in productivity/efficiency from scaling up long-run production
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| Internal economies of scale | when a company cuts costs internally, so they're unique to that particular firm
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| Container principle | dictates that every container should address a single concern and do it well.
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| Experience curves | the more experience a business has in producing a particular product, the lower its costs
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| Purchasing economies | buying raw materials in bulk and getting discounts from suppliers
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| Main benefits of economies of scale | lower LRAC, increased profits, positive impacts on share price, retained profits, larger business scale
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| Potential benefits to consumers from businesses utilising economies of scale | higher real incomes and consumer surplus, improvements in dynamic efficiency, higher real wages(employees), benefits from network externalities(better access)
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| Possible disadvantages to consumers from economies of scale | question the extent to which EoS leads to lower prices, reinforce market power, environmental consequences, price isn’t only metric to measure consumer welfare
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| External economies of scale | changes outside the business
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| Effect of external economies of scale | expansion of entire industry cause lowering unit costs
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| Examples of external economies of scale | uni research departments, transport networks lower logistics costs, relocation of suppliers to centre of production, influx of human capital
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| Diseconomies of scale | increases in the unit cost of supply in the long run due to decreasing returns to scale
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| Consequences of diseconomies of scale | rise in LRAC, expansion beyond optimum size and lost productive efficiency, reduced profits
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| Minimum efficient scale | scale of production where all the internal economies of scale have been fully exploited
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| MES | minimum efficient scale
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| MES point | lowest point on a firm’s LRAC where average cost meets marginal cost
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| MES is likely to be low or high relative to the size of market demand in a highly competitive industry? | low so there is room for many businesses to compete
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| MES is likely to be low or high relative to the size of market demand in a natural monopoly? | high so industry will be highly concentrated
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| 3 causes of an industry having a high MES | large fixed costs of setting up production (e.g. pharmaceuticals), low marginal cost of supplying to extra customers compared to fixed costs, LRAC falls in a natural monopoly so only one business can exploit EoS
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| Examples of markets with high MES | utilities, underground transport systems, social networks and search engines
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| Examples of markets with low MES | cafes, coffee shops, hotels, dry cleaners
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