Micro-economics: Price and Allocation (Costs and Formulas: (Fixed Costs:…
Micro-economics: Price and Allocation
Economies of scale:
in the long run firms can increase the scale of production by increasing all of the factors of production.
Internal economies of scale:
Arises from expansion of the firm itself
Efficiencies from larger scale production
Range of economies E.g technical and financial
Lower long run average costs
Expansion of the firm itself
External economies of scale:
Arises from expansion of the industry and not the within the firn itself.
Expansion of the industry
Benefits most / all firms
Agglomeration economies are important
Helps to explain the rapid growth of many cities
Lower Unit Costs:
- Allow businesses to cut their prices and increase market share. - Make them more competitive in domestic and overseas markets. - Help businesses to make higher profits which can then be reinvested.
When firms have chosen appropriate combination of factors of production and produce the maximum output possible from those fixed and variable factors.
Also relates to when an economy is on there production possibility frontier
An economy is productively efficient if it can produce more of one good only by producing less of another.
Productive efficiency exists when producers minimise the wastage of resources
Diseconomies of scale:
Are increases in the unit cost of supply in the long run. A rise in the firms long run average cost of production
They result from a business expanding beyond an optimum size and losing productive efficiency and may be due to
Co-operation - workers in large firms may develop a sense of alienation and loss of moral
Negative effects of internal politics - information, overload, unrealistic expectations among managers and cultural clashes between senior people with inflated egos.
Control - problems in monitoring productivity and work quality, increasing wastage of resources
Communication - may become difficult as firms grows
When consumer satisfaction is maximised
Resource allocation solely made by the government
Free Market Economy:
Resource allocation os guided by market forces without government intervention
A mixture of both free market and planned
Costs and Formulas:
Costs that do not vary with level of output
Costs that do vary at different levels of out put
= Fixed Costs + Variable Costs
= Total Costs / Output level