16 Costs and economies of scale

Question 1

fixed costs

Answer 1

costs that do not change with output
- total - stays the same
- average - reduces as spread over more units

Question 2

Variable costs

Answer 2

changes as output changes
- total - increases as business produces more
- average - same as variable cost per unit

Question 3

total costs

Answer 3

all costs incurred by a business

Question 4

marginal costs

Answer 4

costs of producing one more unit

Question 5

law of diminishing returns

Answer 5

in the short run when at least one factor of production is fixed the average eturn from s fsctor of production decreases

Question 6

internal economies of scale

Answer 6

arise when a firm grows larger the firm has control over its own decisions
- purchasing
- technical
- marketing
- management
-financial

Question 7

purchasing economies of scale

Answer 7

be able to negotiate a lower cost for purchasing raw materials and perhaps even capital items - bulk buying

Question 8

technical economies of scale

Answer 8

business that is producing many products is likely to be able to buy better technology which can reduce average cost

Question 9

marketing economies of scale

Answer 9

business that is producing more is likely to affd mass-marketing promotion - lower average cost per potential customer

Question 10

management economies of scale

Answer 10

many small businesses cannot afford specialist managers whereas larger usinees can afford managers which are likely to be more efficient and therefore have a lower average cost

Question 11

financial economies of scale

Answer 11

larger business negotiate lower financial costs, such as the rate of interest on a loan

Question 12

external economies of scale

Answer 12

arise when an entire industry expands not just one business and the firm benefits
- technology and skill
- concentration
- infrastructure

Question 13

technology and skill economies of scale

Answer 13

more people are likely to train to work that industry and other businesses are likely to develop better technology decreasing average cost

Question 14

concentration economies of scale

Answer 14

as industry increases in size business within that industry may benefit from being close to one another

Question 15

infrastructure economies of scale

Answer 15

as the industry in a particular area increases there is likely t be better transport and communication links benefiting all the businesses in that area

Question 16

Diseconomies of scale

Answer 16

increases in average costs that can occur from the growth of a business
- communication
- coordination
- motivation

Question 17

communication Diseconomies of scale

Answer 17

as business increases its output communication may become more difficult

Question 18

coordination Diseconomies of scale

Answer 18

as business increases its output organising a complicated production process may become more difficult and businesses costs may increase to overcome this

Question 19

motivation Diseconomies of scale

Answer 19

in a small business it is relatively easy to make sure all employees are motivated as business increases its output not every manager is likely to be able to motivate all employees

Question 20

Minimum efficient scale

Answer 20

lowest point on the average cost curve

Question 21

evaluation of seconomies of scale

Answer 21

• demand for product - market may not demand the increase in output . if firm increases production to MES then it needs to be able to sell all of its output to take advantage
• nature of product - manufacturer will benefit from technical economies of scale but hairdresser is unlikely to
• technological advancement - led to some smaller firms being able to access savings once only available to larger firms
• importance of price - economies of scale allows business to charge a lower price but if product is inelastic may not be a incentive to produce at MES
• nature of product or service - tend to benefit from economies of scale more than others