16 Costs and economies of scale Flashcards

1
Q

fixed costs

A

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

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2
Q

Variable costs

A

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

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3
Q

total costs

A

all costs incurred by a business

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4
Q

marginal costs

A

costs of producing one more unit

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5
Q

law of diminishing returns

A

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

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6
Q

internal economies of scale

A

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

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7
Q

purchasing economies of scale

A

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

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8
Q

technical economies of scale

A

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

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9
Q

marketing economies of scale

A

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

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10
Q

management economies of scale

A

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

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11
Q

financial economies of scale

A

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

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12
Q

external economies of scale

A

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

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13
Q

technology and skill economies of scale

A

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

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14
Q

concentration economies of scale

A

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

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15
Q

infrastructure economies of scale

A

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

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16
Q

Diseconomies of scale

A

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

17
Q

communication Diseconomies of scale

A

as business increases its output communication may become more difficult

18
Q

coordination Diseconomies of scale

A

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

19
Q

motivation Diseconomies of scale

A

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

20
Q

Minimum efficient scale

A

lowest point on the average cost curve

21
Q

evaluation of seconomies of scale

A
  • 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