3.3.3 Economies of Scale Flashcards
What are economies of scale?
Cost advantages that a firm can achieve as it increases its level of output
What are diseconomies of scale?
Cost disadvantages that occur when a firm increases its output
Examples of economies of scale
- technical economies
- managerial economies
- marketing economies
- financial economies
- risk-bearing economies
How can technical economies lead to economies of scale
- specialisation of labour
- better utilisation of machinery
- improved production processes
How can managerial economies lead to economies of scale?
- specialised management teams
- better coordination
- more efficient decision-making processes
How can marketing economies lead to economies of scale?
- bulk marketing
- increased market presence
How can financial economies lead to economies of scale?
- large firms have access to more credit
- lower interest rates on loans
- bulk buying from suppliers
How can risk-bearing economies lead to economies of scale?
- larger firms are better equipped to handle unexpected market fluctuations and risks
- overall cost of risk management is reduced
Examples of diseconomies of scale
- managerial diseconomies
- coordination and control problems
- worker alienation
- communication challenges
What are managerial diseconomies?
- management structure can become overly complex and less efficient
What are coordination and control diseconomies?
- large firms struggle to maintain effective control and coordination among various departments and divisions
What are worker diseconomies?
- employees feel disconnected from company’s goals and values
- lower productivity
- higher turnover rates
What are communication diseconomies?
- communication becomes more challenging
- misunderstandings and errors that increase costs
What is the MES?
Minimum efficient scale is the level of production at which a form achieves the lowest possible long-run average cost per unit of output.
Point where economies of scale are fully realised.
Any further production will lead to diseconomies of scale
What are internal economies of scale?
Cost advantages that a single firm can achieve as it grows in size and expands its production capacity
