5a-economies and diseconomies Flashcards
Q: What are economies of scale?
A: Economies of scale are cost advantages that businesses gain as they increase production, leading to a lower cost per unit.
Q: Why are economies of scale important?
A:
Reduces costs, making products more competitive.
Increases profit margins.
Helps businesses expand and dominate markets.
Encourages efficiency and innovation.
Q: What are the two main types of economies of scale?
A:
Internal Economies of Scale – Cost savings within the business.
External Economies of Scale – Cost savings due to industry growth.
Q: What are the main types of internal economies of scale?
Technical economies
Technical Economies:
Use of advanced machinery and automation.
Leads to higher productivity and efficiency.
Example: A car manufacturer investing in robots for assembly.
Q: What are the main types of internal economies of scale?
Purchasing economies
Purchasing Economies:
Buying raw materials in bulk at discounted rates.
Example: Supermarkets negotiating lower prices with suppliers.
Q: What are the main types of internal economies of scale?
Marketing economies
Marketing Economies:
Large businesses can spread marketing costs over more products.
Example: Global brands advertising on TV for multiple products.
Q: What are the main types of internal economies of scale?
Financial economies
Financial Economies:
Easier access to loans at lower interest rates.
Example: Large companies securing investment at cheaper rates.
Q: What are the main types of internal economies of scale?
Managerial economies
Managerial Economies:
Hiring specialist managers to improve efficiency.
Example: Hiring HR, finance, and IT specialists.
Q: What are the main types of internal economies of scale?
Risk bearing economies
Risk-bearing Economies:
Diversification into different markets/products reduces risk.
Example: Apple selling phones, laptops, and accessories.
Q: What are external economies of scale?
A:
Benefits that all businesses in an industry gain as the industry grows.
Examples:
Better transport networks lower delivery costs.
Supplier development improves availability of raw materials.
Skilled labor pools make hiring easier and cheaper.
Q: What are diseconomies of scale?
A: Diseconomies of scale occur when a business grows too large and experiences higher costs per unit instead of cost savings.
Q: What are the main types of diseconomies of scale?
Communication problems
Communication Problems:
Large businesses struggle with efficient communication.
Can lead to delays and misunderstandings.
Q: What are the main types of diseconomies of scale?
Coordination issues
Coordination Issues:
Difficulties in managing multiple departments or locations.
Can lead to inefficiencies and slow decision-making.
Q: What are the main types of diseconomies of scale?
Mativationalproblems
Motivational Problems:
Employees in large firms may feel less valued.
Can lead to low morale and productivity.
Q: What are the main types of diseconomies of scale?
Bureucracy
Bureaucracy:
Too many layers of management slow down processes.
Increases administrative costs.
Q: What are the main types of diseconomies of scale?
Overcrowding of supply chain
Overcrowding of Supply Chains:
Excess demand can strain suppliers and logistics, increasing costs.
Q: How do economies of scale benefit businesses?
3
Competitive pricing – Lower costs allow businesses to reduce prices.
Higher profits – Greater cost efficiency boosts profit margins.
Business growth – More investment in expansion and innovation.
Q: How do diseconomies of scale affect businesses?
3
Higher costs per unit – Reducing profit margins.
Slower decision-making – Affecting business flexibility.
Customer service issues – Poor management can lead to customer dissatisfaction.
examiner tips :
Compare internal vs. external economies.
Compare internal vs. external economies. Businesses can control internal economies but rely on industry growth for external ones.
examiner tips :
Explain both benefits and drawbacks
Explain both benefits and drawbacks. When discussing economies of scale, always mention potential diseconomies.
