3.2.1 Growth Flashcards
What reasons are there as to why businesses grow?
- Increase profitabililty
- The desire for strong market power over its competitors
- Desire to reduce costs by benefitting from economies of scale
- Increased market share & brand recognition
What is meant by economies of scale?
- Occurs when an increased scale of output results in a lower cost per unit
EOS- help large firms to lower their costs of production beyond what small firms can achieve
What is meant by diseconomies of scale?
- As a firm continues increasing it’s output it will reach a point where its average costs will start to increase
- It is the negative effect of growing too big
What are the disadvantages of diseconomies of scale?
- As unit costs rise in dseconomies of scale business is unable to charge lower prices- be less competitive & therefore market position= decrease in market share
3 C’s
- Less control
- Less Communication
- Less Coordination
Within economies of scale why do average costs fall as quantitiy increases?
- You can negotiate better deals as you buy more of them- bulk buy
- Specialisation & specialised equipment- as you produce more workers may become skilled & you can buy better equipment which is more efficient at reducing costs
- The better equipment & more skilled workforce will lead to greater efficiency & productivity for the business which in turn will lead to lower unit costs
- AAR of lower costs- businesses can charge lower prices-competitve advantage
How can increased market power over customers & suppliers help a business grow?
- Larger firms typically have more influence in negotiations
- They can dictate terms to suppliers leading to lower costs
- Can also implement strategies that give them an advantage over small competitors - which can help in maintaining customer loyalty & reducing price sensitivity
How can increase market share & brand recognition help a business grow?
- Growth leads to higher market share which can enahance brand recognition
- A larger prescence in the market can attract more customers & reinforce brand loyalty
How can increased profitability help a business to grow?
- Higher sales volume can lead to greater revenues whilst lower costs improve margins
- This can proivde funds for further investment, innovation or dividends to shareholders
What are internal economies of scale?
- Occur as a result of the growth in the scale of production within the firm
- The firm can benefit from lower average costs generated by factors from inside the business
What are external economies of scale?
- Occurs when there is an increase in the size of the industry in which the firm operates
- The firms can benefit from lower average costs generate by factors outside the business.
What types of internal economies of scale are there?
- Financial economies
- Managerial economies
- Marketing economies
- Purchasing economies
- Technical economies
- Risk bearing economies
What are financial economies?
- Large firms often recieve lower interest rates on loans than smaller firms as they are percieved less risky
- A cheaper loan lowers the cost per unit (average cost)
What are managerial economies?
- Occurs when large firms can employ specialist managers who are more efficient at certain tasks & this efficiency lowers the average cost (AC)
- Managers in small firms often have to fulfil multiple roles & are less specialised
What are marketing economies?
- Large firms spread cost of advertising over a large number of sales and this reduces the AC
- They can also reuse marketing materials in different geographic regions which further lowers the AC
What are purchasing economies?
- Occur when larger firms buy raw materials in greater volumes & recieve a bulk purchase discount which lowers the AC
