1.5 Economies & Diseconomies Of Scale Flashcards
Define economies of scale
• cost advantages a business experiences as it ⬆️ its scale of production
• Average unit costs ⬇️ as output ⬆️ due to greater efficiency, bulk buying, or spreading fixed costs over more units
• Can be internal (within the firm) or external (within the industry) & improve competitiveness and profitability
Define diseconomies of scale
• ⬆️ in average unit costs as a business grows beyond its optimal size
• Caused by inefficiencies such as poor communication or coordination problems in large firms
• ⬇️ profitability & can weaken competitiveness despite larger output
Define productive efficiency
• when a firm produces at the lowest possible average cost, using all available resources efficiently
• Means no output can be ⬆️ w/out ⬇️ costs
State 6 internal economies of scale
• Financial economies
• Managerial economies
• Marketing economies
• Purchasing economies
• Technical economies
• Risk-bearing economies
Explain financial economies (internal economy of scale)
large firms often receive lower interest rates on loans bc are less risky
cheaper loan = lower costs / unit
Explain managerial economies (internal economy of scale)
large firms can employ specialist managers who are more efficient
EFFICIENCY = ⬇️ COSTS
managers in small firms usually less specialised + fulfil many roles
Explain marketing economies (internal economy of scale)
large firms spread cost of advertising over large number of sales = ⬇️ Costs
Explain purchasing economies (internal economy of scale)
large firms buy raw materials in greater volumes = bulk purchase discount = lower costs
Explain technical economies (internal economy of scale)
firm can use its machinery at higher level of capacity bc of ⬆️ output = spreading cost of machinery over more units = ⬇️ costs
Explain risk-bearing economies (internal economy of scale)
firm can spread risk of failure by increasing its number of products (less failure lowers average costs)
State 4 external economies of scale
• Geographic Cluster
• Transport Links
• Skilled Labour
• Favourable Legislation (laws)
Explain geographic cluster (external economy of scale)
as industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business
## Footnote
eg. Silicon Valley —> ancillary firms that offer computer parts move closer
Explain transport links (external economy of scale)
improved transport links develop around growing industries:
to help get people to work = lower costs bc attract more skilled workers & ⬇️ lateness
Improved logistics (faster roads / rails) speed up delivery times = ⬆️ efficiency = ⬇️ costs for storage / fuel / delay
Explain skilled labour (external economy of scale)
an ⬆️ in skilled labour ⬇️ cost of skilled labour = ⬇️ COSTS
the larger the geographic cluster = larger pool of skilled labour
Explain favourable legislation (external economy of scale)
reduces costs as gov. support certain industries to achieve wider objectives
Explain management diseconomies
managers work more in their self-interests = ⬇️ efficiency & ⬆️ costs
Explain communication diseconomies
organisational structure becomes ⬆️ complex w/ multiple layers of management = communication difficulties
Explain geographical diseconomies
firm has widespread bases of operations across multiple geographic locations = logistical & communication challenges = ⬆️ costs
Explain cultural diseconomies
firm expand into foreign markets in which workers have very different work / productivity norms = production disruption = ⬆️ average costs
