Economics of Scale

  • Economies of scale occurs when increased output leads to lower long run average costs.

Diagram of Economics of Scale


Note Economies of Scale occurs upto Q2. After Q2 dis-economies of scale starts to occur

Basically as a firm expands it receives increasing returns to scale. To understand why economies of scale occur it is useful to think about large companies and how they benefit from their size.

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Cannibalise definition

To cannibalise your assets means that you create a new product which eat into sales of your old products. For example, suppose Microsoft have good sales for its X Box. If it introduced a new superior product, like the ‘X box mark 2’. Nobody would want to buy the old X Box. Therefore, sales of …

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What Should Happen To Northern Rock?

Readers Question from:Trevor Downer. Glasgow. From what little I know the theory of Economics appears to have very little scientific basis. Two “experts” will give two different answers, add a third “expert” and yet another answer is provided.
Can someone explain to me why there is no easy answer to the problem of the Northern Rock Bank?I presume that the 26 billion pounds loaned by the government is the amount that the bank owes, including interest, to lenders to the bank. I presume that this money has been loaned by the bank to borrowers that have the assets that are equal to that amount and will return a greater amount over the agreed loan period.

This suggests to me that the simple answer would have been to close the bank down, for the government to pay that sum directly to the lenders and have the borrowers make re-payments directly to the government, thus, no losers and, over a long period, large gains for the government, ie, us the taxpayers.

Have I gone wrong somewhere? Where have I gone wrong? An explanation would be appreciated.

Firstly, you are absolutely right about Economists. Put 10 in a different room and you will get 11 different answers (or so the joke goes)

It is an interesting question.But, I think that if the bank is closed down i.e. made bankrupt, it is hard for the government to get its money back. Because if you declare bankruptcy there is no requirement to pay back your debtors. If the bank closed down it would be difficult for the government to get its money directly from the borrowers.

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Increasing Productivity On Internet

Since Economists are concerned with efficiency, I thought I would share some ideas about the efficient use of time, particularly on the internet.

If you read this post, the chances are you spend a lot of time surfing the internet. But, how much of this time is profitably spent? Just because the internet has great possibilities and a wealth of information, it doesn’t mean that it will always increase our productivity. These are some tips to increase our productivity

Have a Clear Purpose

When you sit down to your computer do you know what you intend to achieve? or do you just sit down and see what happens. If you want to spend 30 mins surfing through different sites, that is fine. However, the problem is that we often just surf aimlessly for want of having a clear target. When you turn on the computer have a mental check box of things that you want to achieve and complete. Once these are completed, either turn off the computer or allow yourself to relax and visit sites for enjoyment

Avoid Repetition.

One thing that really wastes time is repeating activities. A good example, is multiple checking of email accounts. It may only take 1-2 minutes, but, if you check it 10 times a day that is 20 minutes. That is a pretty high % of your total computer time. If you checked it once, it may take a total of 5 minutes. There are several sites where we may keep checking, even though not much has changed. If we find we are repeating things, try doing something different.

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Testing Marshall Lerner Condition

Readers Question: When my class and I try to test the Marshall-Lerner condition it doesn’t always work. i.e. we assumed a country with just one export and one import and assumed their price elasticities added up to less than one. We gave each a price and quantity that led to a current account balance =0 …

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A Humorous look at the Sub Prime Crisis

“The thing to remember is that these markets are run by very clever and sophisticated people…” “It has some good words in it, like high.” “Yes, high is a good word, better than low anyway.” Very sharp commentary on the sub prime crisis. The scary thing is that there is very little exaggeration at all! …

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Exchange Rate Predictions

Predicting exchange rates is not as easy as some experts may suggest. There are many factors at work in determining exchange rates – economic fundamentals are only part of the equation. To predict future exchange rate movements we need to look at a variety of factors. The most important include:

Interest Rate Movements.

Interest rates have the biggest single effect in determining exchange rates. Higher interest rates make it more desirable to save money in that particular country. This causes an inflow of hot money which leads to an appreciation in the exchange rate. International hot money flows account for a high % of capital flows.

Economic Prospects

Linked to interest rates is the general economic prospects of an economy. If an economy is slowing down, due to say falling house prices, it is likely that interest rates will fall. This is because when the economy slows down, inflation falls allowing Central Banks to cut interest rates. E.g. slower growth in the US has caused expectations of interest rates to fall, this in turn has led to the devaluation of the dollar.

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What is Amoritisation?

Readers Question: What is  Amortisation? Amortisation is the running down of a loan through regular payments. A good example is a capital repayment mortgage. In this case, the homeowner pays monthly instalments paying both interest on the loan and also capital repayments. This means that after 30 years the loan will be paid off. The …

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