1.2: Economies of Scale Flashcards
1.2.1: Economies of Scale1.2.2: Public Sector1.2.3: Private Sector Ownership 1.2.4: Business Costs1.2.5: Break-Even Analysis 1.2.6: Sources of Finance
What are Economies of Scale
The reduction in average cost per unit
The First type of Economies of Scale is Internal Economies. What are they?
Bulk-Buying (Purchasing), Financial, Technical, Marketing, Managerial and Risk-Bearing
How are Technical Economies achieved
To grow a business will increase production by making greater use of capital equipment so more can be produced with less waste and greater efficiency
How are Marketing Economies achieved
An increased scale of production means that marketing costs are now spread over more units therefore reducing the average costs of marketing
How are Managerial Economies achieved
As the business grows in size so the levels of hierarchy with in the business increase and they employ specialists in each field because they make far fewer mistakes
How are Educational Economies achieved
Colleges assist with the development of a skilled labour force by offering skills-based courses and R&D capabilities
How are Supplier Economies achieved
Suppliers will look to relocate themselves closer to the industry to reduce transport costs and responsiveness to use a Just-In-Time System
How are Infrastructure Economies achieved
Improved road networks, better rail and port links, faster broadband services and improved telecommunications all of these lower the operating cost of the entire industry through increased levels of efficiency
How do Co-Ordination Diseconomies occur
As the business grows different working practices are used over different locations meaning its difficult for management to monitor so mistakes start to occur which leads to a rise in the LRACs
How do Communication Diseconomies occur
As the business grows hierarchy levels grow, this makes communication ineffective due to messages being lost which can lead to some staff not understanding their role such actions lead to low productivity levels and a rise in LRACs
How do Motivational Diseconomies occur
The combination of Co-ordination and Communication leads to low productivity and production levels raising costs and making a firm less competitive with the market
Are Diseconomies Inevitable
Their impact can be minimised by improving systems before hand
What is the Public Sector
Businesses owned, financed, and controlled by the state such as The NHS, Armed Forces, and Education they are non-profit making and paid for by taxation
Why is the Public Sector Important
Largest Employers in Europe, the govt spend over £800 billion / year , the largest being the NHS
What is the difference between Public Goods and Merit Goods
Public: Necessities that dont generate profit like street lighting, forcers and the police
Merit: Something the govt thinks is good for us that we should all have whether we can afford it or not
To be a Public Good something has to be Non-Excludable and Non-Rival. What does this mean?
Non-excludable means individuals cannot be prevented from enjoying the benefits of a good or service.
Non-Rival means everyone can gain from the consumption of the good or service
What are the 3 Public Sector Objectives
Provide a Quality Service, Provide Value for Money and Provide for Customer Needs
State 3 Pros and Cons of the Public Sector
Pros: Job Creation, Provision of Key Goods/Services and Provides benefits for the whole population
Cons: Cost leads to higher taxes, maybe inefficient if little competition and Governments may have little business experience
What is as Private Sector Organisation
Businesses owned, financed, and controlled by individuals
State 4 Private Sector Objectives
Survival (30% fail), Sales Maximisation, Creation of Brand Loyalty and Social Objectives
What is unlimited liability
A business that hasn’t become a company has unlimited liability so the owners are responsible for anything
What is Limited Liability
The owners are only responsible for what they have invested in the business and their personal assets are not at risk
What is a Sole Trader and What are the advantages and disadvantages
Owned by one owner, however, they face unlimited liability, but they are easy to set up, respond quickly, and hardly any paperwork, on the other hand, they have limited money, limited capital investment and a limited skills base
What is a Partnership
Between 2 and 20 owners, they face unlimited liability unless they bring in a silent partner or they can become an LLP where each partner is responsible for their own debt (Shared Control and Arguments however Raise Capital and Wider Skills Base)
What is a Private Limited Company (LTD)
incorporated business but has separate legal identity from owners they have to be part of the business, shares cannot be sold, they have limited liability and access to more capital however legal formalities and shares cannot be sold
What is a Public Limited Company (PLC)
Incorporated business run by a board of directors and has an AGM, they have limited liability and Stock exchange however lots of admin work and shareholder pressures
What is Divorce of Ownership and Control
When an owner doesn’t control day to day decisions, instead they are made by managers and directors
State 3 factors affecting ownership type
Risk, Time and Financial Requirements
What are the two main costs a business has to account for
Fixed Costs (Rent) + Variable Costs (Raw Materials) = Total Cost
What are Semi-Variable Costs
Some have both a fixed and variable element such as a telephone
What is the formula for calculating average cost
Total Cost / Quantity
What is the difference between Direct and Indirect Costs
Direct costs arise from the production of a good or service whereas indirect costs are things such as advertising
What is Sales revenue
Turnover doesn’t take into account costs
Quantity Sold X Selling Price
What is Profit
Money after costs
Sales Revenue - Total Costs
How does a business use and improve its profit
Distribute and Retain they can improve profit by reducing costs or selling more
Why is Profit so important
Profitability of a good or service can enable decisions making so it won’t endanger the business if spotted in time and it allows for better budget allocation
What is Break-Even
Point where total revenue is the same as total costs
Fixed Costs / Contribution Per Unit
What is Contribution
A measure of how much each item sold contributes towards the fixed costs of the business
Selling Price - Variable Cost Per Unit
What is the Margin of Safety
The difference between the level of output beyond break-even less the break even output
What are the six possible changes to a break even chart
Increase to selling price (revenue), Decrease to selling price (revenue), Increase in Variable Cost/ Unit (VC), Decrease in Variable Cost/ Unit (VC), Increase in Fixed Costs (FC) and Decrease in Fixed Costs (FC)
What are the 4 assumptions of Break Even
Selling price isnt affected by units sold, fixed costs remain the same, variable costs per unit are the same for every unit and that every unit produced is sold
What are the Pros and Cons of Break Even Graphs
Pros: Quick and Simple, What if analysis and key element of a business plan’
Cons: Assumptions, Simplification of the real world and Ignores competitors actions
State two internal sources of finance
Retained Profit: Profits from pervious year after tax and shareholder dividends
Sale of Fixed Assets: Idle assets can be a large sources of cash to fund new projects
State another two internal sources of finance
More effective use of Working Capital: Cashing off debtors, selling stocks ang negotiating longer credit periods
Personal Finance: Start-ups take this route commonly
State two external sources of finance
Factoring: Selling its debt to a factoring company who gives the business 80% immediately of what it’s owed
Sale and Leaseback: When a business sells any machinery on and leases them back from the purchaser to allows continued use of what has been sold
State another two external sources of finance
Trade Credit: Obtaining goods from another business and paying for them at a later date when they have the money to pay
Hire Purchase: Use of assets in a return of a monthly fee over a set period of time where a set amount of money has to be repaid
What are the 4 factors that determine source of finance
Availability, Cost, Risk and Control
