1.6 Growth and Evolution Flashcards
What are ‘economies of scale’?
Economies of scale refers to the case where the average unit cost of production decreases as the level of output increases
What are ‘diseconomies of scale’?
Diseconomies of scale describes the case when the average unit cost of production actually increases as the level of output increases. This increase in average unit cost is usually explained by the difficulty of managing very large operations.
What are the 6 economies of scale?
1) Purchasing (bulk-buying)
2) Marketing
3) Financial
4) Technical
5) Risk-Bearing
6) Managerial
What is the ‘purchasing’ economy of scale?
It is possible to acquire inputs such as ingredients and materials at a lower cost when larger amounts are purchased. This means firms who use bulk buying can buy the materials/ ingredients at a low price, lowering the cost of production and therefore resulting in a higher profit.
What is the ‘marketing’ economy of scale?
It can be expensive to develop a marketing campaign and to choose and pay for an appropriate advertising medium. When these costs are spread over a larger volume of sales, the marketing costs in comparison to a single unit of output decrease. Which means that larger firms, pay less marketing costs per unit of output. Which then again results that the cost of production per unit falls.
What is the ‘financial’ economy of scale?
Large corporations have a lot of negotiating power because they often carry a lower risk. This means that they are able to negotiate better lending terms and lower interest rates with their banks. As they have lower interest rates, their cost per unit is lover, and therefore their output increases.
What is the ‘technical’ economy of scale?
Technical refers to the use of more advanced and efficient machinery. Investing in this equipment allows the firm to produce more efficiently. Furthermore, as output increases, the cost of equipment can be spread over a higher volume of production. This all results in the cost of machinery per unit of good to decrease, and therefore the cost of production to fall.
What is the ‘risk-bearing’ economy of scale?
Large corporations are able to spread their goods and services throughout many different markets targeting very different audiences. This allows them to keep growing or remain stable even when there is a fall in demand in a particular sector, cause the other sectors will keep growing. The cost of failure is decreased.
(diversifying)
What is the ‘managerial’ economy of scale?
Large corporations most likely require more personnel. This allows the hiring of specialized managers in certain areas, which leads to a more competent and productive workplace. A more productive workplace leads to a lower cost of production per unit of good.
What is a ‘diseconomy’ of scale?
In the case that companies become so big, their operations may become less efficient, leading to an increase in unit costs as output decreases
What are some causes of ‘internal’ diseconomies of scale?
- Too many layers of management
- Decisions take time to reach the whole workforce and workers at the bottom feel insignificant
- Communication problem
- Inefficient
What are some advantages of being a big business?
1) Survival
2) Economies of scale
3) Higher status
- -> Market leader status
4) Increased market share
What are some advantages of being a small business?
1) Greater focus
2) Greater motivation
3) Competitive advantage (can provide more personalized services)
4) Less competition
What are the two types of growth?
- Internal growth
- External growth
What is ‘internal growth’?
Internal growth includes everything an organisation undertakes on its own to expand and develop.
