Economies of scale

A fall in the long run average cost of production as output rises

Financial- the fact that bigger/public companies are more able to take out
loans at a lower interest rate from the bank in comparison to small firms
like corner shops. This is because they are seen to be at a lower risk,
especially in comparison to new businesses.
Technical- cost savings a firm makes as it grows and arise from large scale
mechanical processes and machinery. Using machinery and using it fully
and efficiently lowers the costs of production.
Purchasing- When larger firms buy in bulk and achieve purchasing
discounts. Cost per unit falls when buying products individually
Managerial- managing a firm well so having specialised workers means
greater output as the output per worker increases and this means lower
cost per unit
Internal diseconomies of Scale
Poor communication- Larger firms suffer from poor communication
because they find it difficult to maintain an effective flow of information
between departments, divisions or between head offices. Time lags in the
flow of information can also create problems in terms of the speed to
changing market conditions. If theres a communication problem in the
chain of command, production slows down and output falls. Therefore, the
cost per unit increases.
Lack of motivation. If firms get too big, less workers get recognised for
their work/ increased skills meaning they dont receive an increase in
wages. Therefore, this leads to a lack of motivation and thus a fall in
output. As a result cost per unit increases.
If firms get too large then it becomes harder to manage and supervise
individual. Therefore, this loss of direction would result in workers not
knowing what to do and production would eventually slow down. Larger
firms may find it more difficult to coordinate operations than smaller firms.
Long run costs
Shows whats happening to average cost of a firm when firm expands, and
is at a tangent to the series of short run average cost curves. Each short
run average cost curve relates to a separate stage or phase of expansion
Long run- all factors of production can be varied. VARIABLE COSTS ARE COSTS
THAT DO CHANGE WITH OUTPUT E.G RAW MATERIALS- COST FALLS WHEN THE
OUTPUT INCREASES (SUPPLY AND DEMAND)
Short run- at least one factor of production is fixed. FIXED COSTS ARE COSTS
THAT DONT CHANGE WITH OUTPUT E.G RENT COSTS WILL NOT CHANGE NO
MATTER WHAT THE OUTPUT IS
Law of diminishing returns (excess output)
As variable factors are added to a fixed factor, the marginal product of the
additional factor is less than the marginal product of the previous factor.

Hairdresser- fixed factor (space) rent stays the same. Get too crowded if the
amount of staff increases- no space for them to work. Stood there doing nothing
(dont contribute to anything). Marginal product falls as production slows down.