Question

List two separate reasons that marginal costs might decrease with scale, and two separate reasons why marginal costs might increase with scale.

Decrease with scale:

a)

b)           

Increase with scale:

c)

d)

Answer 1

>Decrease with scale

*Specialisation

Specialisation means that employees focus on particular tasks assigned to them. They become more efficient in the accomplishing that particular task.As a result, less money and time is needed for completing that task. Thus, Marginal costs fall with production.

* Efficient capital.

Improvement in technology is associated with reduction in cost of production. The most efficient machines and equipment are based on cutting edge technology and have high production capacity.

> Increase with scale.

* Breakdown of relationships with suppliers and buyers

When firm is small, there is often a direct relationship between owner managers and customers or suppliers. As the firm grows, these relationships are hard to maintain as the owner or managers will finds his time is taken up with administration or problem solving. Marginal costs of firm will rise.

*increasing employment costs.

As the firm grows, more people will be employed. Labour unions will be formed. Labour unions will bargain with owners for more wages. Firm will have to spend more.