3- Economies and diseconomies of scale Flashcards
Types of internal economies of scale
- Technical economies
- Financial economies
- Managerial economies
- Risk-bearing economies
- Marketing and purchasing economies
Types of external economies of scale
- Labour
Technical economies of scale
- These arise as a result of what happens to the production process.
- Specialisation- appointment of specialist workers and machines.
- Balanced teams of machines
- Increased dimensions
- Research and development
- Indivisibility of capital
Financial economies of scale
- Large firms, more assets, less risk, easier to access finance with lower interest rates.
Risk-bearing economies of scale
- Large firms can operate in a range of markets, so if one fails, their whole business won’t collaspe.
Managerial economies of scale
- Large firms can afford specialist managers in each field who have great knowledge of the job.
Marketing and purchasing economies of scale
- Buying in bulk
- Specialisation: taking on more efficient buyers and sellers
- Distribution: cheaper transport due to large batches
Labour external economies of scale
- If there are lots of successful firms in that industry in area lots more workers come to that area.
- Local education and training schemes will be set up to prepare people to take up jobs in that industry.
Causes of diseconomies of scale
- Workers
- Geography
- Change
- Management
- Price of materials
How workers can cause diseconomies of scale?
- In large firms workers can become demotivated due to not being noticed for promotion.
- Lack of identification with the business.
- Fall in productivity
How geography can cause diseconomies of scale?
- A large firms has to transport finished products miles away.
- Large firms may find it hard to control parts of business miles away.
- Fall in productivity
How change can cause diseconomies of scale?
Large firms are less flexible than smaller firms.
How prices of materials can cause diseconomies of scale?
- Despite potential monopsony power, an increase in demand for raw material will increase prices and their costs/
How management can cause diseconomies of scale?
- Coordination and control: hard to manage
- Communication: slow and inaccurate communication throughout large businesses.
- Fall in productivity
What leads to internal economies of scale?
When quantity is increasing more than total costs.
What leads to external economies of scale?
Fall in total costs
What leads to diseconomies of scale?
When total costs are rising more than output.
