143 economies of scale Flashcards
what is economics of scale
the reduction in average costs of production that occur as a business increases its scale of production
identify the internal types of economies of scale
- purchasing
- marketing g
- technical
- managerial
- financial
-risk bearing
what is purchasing economies
- as a business grows they increase the rise of orders for raw materials
- resulting in discounts being given-cost of each individual component purchased will fall
- therefore reduce average cost of production
what is technical economies
- as a business grows they are bake to purchase the latest equipment and incorporate new methods of production
- increases efficiency and productivity
what is financial economies
- as businesses grow they will have access to a wider ravage of finance- they have more assets that act as as a security for loans
- they can negotiate more favourable rates of interest on borrowed money
what is mangerial economies
- as businesses grow they are able to employ specialist managers- they know how to get the best value for each pound spent in the business eg in production/marketing/purchasing
- increases efficiency and reduces average costs of producing selling goods/services
what is marketing economies
- as businesses grow each pound spent on adverting will have greater benefit for the business
identify external economies of scale
-> occurs outside the business and benefits the whole industry resulting in lower average costs
- financial services
- education economies
- suppler economies
- infrastructure economies
what is financial services
- as an industry grows, financial services can improve
- they may produce services that benifit certain industries eg. banks may afford financial products specific to the industry- resulting in the firm having better cash flow and available finance to invest
- insurance deals may be available to help a business reduce risk
what is educational economies
- local colleges will set up training schemes suited to the largest employer’s needs, giving an available pool of skilled labour leading to more efficient workers being employed
what is supplier economies
- a network of suppliers may be attracted to an rea where a particular industry is growing leading to more competitive prices ie.lower unit costs
what is infrastructure economies
- infrastructure such as new roads and other transport links, and communication improvements can benefit all busisnes in an area.
- this helps gain customers and reduce the cost of transport/ delivery
what is diseconomies of scale
the factors that cause higher costs per unit when the scale of an organisation continues to increase
what are the 3 internal diseconomies of scale
-coordination issues- the larger the organisation becomes, the more difficult it is to coordinate eg.manager meetings can be viewed as an overhead cost
-communication issues- as an organisation grows , hierarchy increases, efficiency and effectiveness of communication breaks down
-motivation issues-> it is harder to satisfy and motivate workers as they may feel lost, ignored and distanced from the decision makers
evaluate the impact of diseconomies of scale
(+) -increased market power- able to negotiate deals with suppliers
- brand registration
(-) higher average costs, loss of efficiency eg. decision making/ productivity
- lower employee morale- large organisation-less connected/valued- higher absenteeism-higher costs
- reduced profitability- higher costs and inefficiencies-less profit- making the company less competitive in the long run
