3.4 Economies and Diseconomies of Scale

Question 1

What are economies of scale?

Answer 1

Occurs when unit costs fall as output increases

Question 2

What are internal economies of scale?

Answer 2

Results from an increase in the scale of production of a firm

Question 3

What are external economies of scale?

Answer 3

Results from an increase in the scale of production in the industry in which a firm is operating

Question 4

What are technical economies of scale?

Answer 4

Large scale businesses can afford to invest in expensive and specialist capital machinery which ultimately do things like lower cost per unit and increase competitiveness in the long run.

Question 5

What are purchasing economies of scale?

Answer 5

When large firms are offered a discount for buying in bulk

Question 6

What are managerial economies of scale?

Answer 6

Large scale manufacturers employing specialist workers (division of labour)

Question 7

What are economies of scope?

Answer 7

When unit costs are cheaper when a business produces a range of products rather than specialise in a few

Question 8

What are marketing economies of scale?

Answer 8

When a firm can spread its advertising over a large output and can purchase inputs in bulk at negotiated discounts

Question 9

What are risk-bearing economies of scale?

Answer 9

Allows firms to spread risk by having a range oif products to fall back on

Question 10

What are financial economies of scale?

Answer 10

Larger firms higher rated by the financial markets to become more ‘creditworthy’ and have access to credit facilities.

Question 11

What are diseconomies of scale?

Answer 11

Diseconomies of scale occur when there is an increase in average total cost as the scale of production increases

Question 12

What are communication diseconomies of scale?

Answer 12

Larger firms find it more difficult to communicate efficiently within the organisation.
The manager of a small firm will be able to communicate effectively with all members of the workforce

Question 13

What are coordination diseconomies of scale?

Answer 13

Larger firms find it more difficult to manage the increased number of personnel and customers
It might become increasingly difficult to delegate to and motivate workers

Question 14

Why do higher average costs discourage the growth of firms?

Answer 14

Larger firms are disadvantaged by higher average costs

This discourages them from growing as this could lead to a fall in profits or a move into loss