a) Definitions and formulae

Total Revenue

Definition: The total amount of money that a company earns through the selling of its goods and services over a given period of time.
Formula: Total Revenue = Price per Unit × Quantity Sold

Total Costs

Definition: The amount of money spent by a firm on producing a given level of output.
Formula: Total Costs = Total Fixed Costs +Total Variable Costs

Total Fixed Costs

Total Variable Costs

Average (Total) Costs

Definition: The total costs incurred to produce a product, divided by the total number of units produced.
Formula: Average Cost = Total Costs / Quantity Produced

Profit

Definition: The financial gain a business earns when total revenue exceeds total costs.
Formula: Profit = Total Revenue − Total Costs

b) Economies of scale

Definition: Economies of scale occur when a firm’s average costs decrease as output increases.

Internal Economies of Scale

Definition: Internal economies of scale are cost reductions that a firm experiences as it increases its production capacity internally.

Types of internal economies of scale:

Purchasing (bulk buying) - The cost savings incurred by a firm when it purchases raw materials in large quantities, allowing it to negotiate lower prices per unit.
Marketing - The ability of a large firm to spread its advertising and marketing costs across a higher volume of output.
Technical - The benefits gained by a firm through the use of specialised machinery which improve efficiency and lower production costs.
Financial - Larger firms can secure financing at lower interest rates due to their reputation and greater access to capital.
Managerial - Larger firms are able to employ specialist managers to manage production and operations, leading to increased efficiency.
Risk bearing - Larger firms can diversify their product range which spreads risk across different products or markets to reduce vulnerability.

External Economies of Scale

Definition: External economies of scale lower average costs for individual businesses when the industry grows.

Types of external economies of scale:

Skilled labour - The availability of skilled workers can help reduce training costs and increase productivity.
Infrastructure - The quality of nearby infrastructure can impact operational costs such as transportation for businesses in the area.
Access to suppliers - Having suppliers nearby allows firms to source inputs more efficiently and at lower costs.
Similar businesses in the area - The close proximity of similar businesses allows firms to share resources leading to cost reductions for firms involved.

c) Diseconomies of scale

Definition: Diseconomies of scale occur when a firm’s average costs increase as production increases.

Types of diseconomies of scale:

Bureaucracy — Large firms may develop more complicated systems, which can lead to communication delays, inefficiencies, and increased costs.
Communication problems - Communication issues between departments or levels of the hierarchy may arise as businesses expand, leading to delays and miscommunications.
Lack of control - Larger organisations are usually more difficult to manage, which results in inefficiencies and increased costs when managerial errors occur.
Distance between top management and workers at the bottom of the organisation - In larger organisations, there may be a disconnect between senior management and lower-level employees, which lowers morale as lower-level employees feel undervalued.

Long Run Average Cost (LRAC) Curve Diagram

The LRAC curve is a U-shape diagram, which shows economies of scale at lower levels of output and diseconomies of scale at higher levels.