Answer 141

External Economies of scale:

These are forces outside a firm which cause the average / unit costs of that firm to decline as the industry grows in size.

Better infrastructure (Ext)

As roads / communications etc. improve they will benefit all firms.

 Bulk purchasing of raw materials by the industry (Ext)

As an industry expands firms require more materials / components. These may become cheaper as suppliers expand to meet increased demand.

 Development of specialist firms (Ext)

Some of the jobs, which a firm once  performed may be contracted out to specialist

firms at reduced costs e.g. the supply of linen to hotels.

Development of separate R & D units (Ext)

As industry becomes very large, R&Dagencies may set up to provide facilities forindividula firms / the costs of research may beshared between firms or with a public body like Teagesc

 Suppliers of Machinery (Ext)

Manufacturers of machinery will be encouraged to design, develop and produce machines for expanding industry. These advanced machines will help reduce costs.

 Development of Training Courses (Ext)

Workers in expanding industries may be provided with training courses by VECs, FÁS there by helping them become more efficient.

 Supports from Public Bodies (Ext)

Some public bodies help particular industriese.g. Failte Ireland / FAS may help firms in the tourism industry.

Subsidiary Trades may develop (Ext)

As an industry grows subsidiary trades may develop to service the expanding industry e.g Hotels, B&B’s located close to airports etc.

 

Law of Diminishing Marginal Returns

 

As more units of a variable factor of production are added to other (constant) factors of production the returns to the variable factor will eventually fall.

Using the table below, state after which level of employment diminishing marginal returns set in. Explain your answer.

Number of persons employed   1                      2                     3                      4                     5

Total Output (in units)                10                    25                   42                   58                   62

Marginal Output (in units)        10                    15                    17                  16                    4

 

The point after which Diminishing Returns set in: When the 4th person is employed/After the 3rd person because marginal output has declined (from 17 units to 16 units)

The Law of DMR is caused by the limits of one fop in the short run (eg space in a single factory) being pushed by adding more and more of a variable fop (eg new employees).