3.2 Growth Flashcards
Reasons why businesses grow
To achieve economies of scale.
Higher levels of profitability.
To increase market share and brand recognition.
For stronger market power over customers and suppliers.
Economies of scale
As business increases scale of output it lowers it’s average costs.
Diseconomies of scale
Business reaches point where increasing scale of output causes average costs to increase.
Internal economies of scale
Growth in scale of production within the firm.
External economies of scale
Increase in size of industry in which firm operates.
Unit cost formula
Total production costs in period/Total output in period
Productive efficiency
Level of output where not able to reduce costs further.
Example of internal economies of scale
Financial
Managerial
Marketing
Financial
Large firms lower interest rates on loans which lowers cost per unit.
Managerial
Large firms employ specialist managers and their efficiency lowers average costs.
Marketing
Large firms spread costs of advertising which reduces average costs.
Example of external economies of scale
Geographic
Infrastructure
Technology
Geographic
As an industry grows ancillary firms move closer to manufacturers which cuts costs and generates more business.
Ancillary services
Business provides goods or services which are required for another business to produce goods or services.
Infrastructure
Improved transport help people get to work and lowers average costs.
