143 Economies of Scale

Question 1

What are economies of scale?

Answer 1

The reduction in (average) costs per unit of production that occur as a business increases its scale of production or as the business grows.

Question 2

What are purchasing economies of scale?

(Internal)

Answer 2

As businesses grow, they increase the size of orders of raw materials or components, resulting in discounts and lower average unit costs (bulk buying discounts).

Question 3

What are marketing economies of scale?

(Internal)

Answer 3

As businesses grow, each pound spent on advertising has greater benefits, spreading the cost of marketing campaigns over a greater level of output, reducing average unit costs.

Question 4

What are financial economies of scale?

(Internal)

Answer 4

As businesses grow, they have access to a wider range of finance and can negotiate more favorable rates of interest, reducing average unit costs.

Question 5

What are managerial economies of scale?

(Internal)

Answer 5

As businesses grow, they can employ specialist managers who improve decision making and reduce average unit costs.

Question 6

What are technical economies of scale?

(Internal)

Answer 6

As businesses grow, they can purchase the latest equipment and incorporate new production methods, increasing efficiency and reducing average unit costs.

Question 7

What are external economies of scale?

Answer 7

Cost savings that occur outside of a business due to the growth of the whole industry.

Question 8

What are supplier economies?

(external)

Answer 8

A network of suppliers attracted to a growing industry reduces buying costs, leading to lower average unit costs.

Question 9

What are educational economies?

(external)

Answer 9

Local colleges set up training schemes suited to the largest employers’ needs, providing a skilled labor pool and reducing recruitment and training costs.

Question 10

What are financial economies in the context of external economies of scale?

(external)

Answer 10

Financial services improve as banks and other institutions provide services geared towards a particular industry, reducing average unit costs.

Question 11

What are diseconomies of scale?

Answer 11

Diseconomies of scale occur when a business faces higher costs per unit as it grows in size, often due to communication and coordination problems.

Question 12

What are internal economies of scale?

Answer 12

Reductions in average cost per unit of output
as a result of increasing internal efficiencies of the
business as it grows in size