6) economies and diseconomies of scale

Question 1

what are economies of scale?

Answer 1

reduction in LRAC as output increases

Question 1

what are the two types of economes of scale

Answer 1

internal
external

Question 2

when do we have internal economies of scale

Answer 2

within a businesses control which can be exploited as they grow bigger

Question 2

whats the pneumonic to remember the internal economies?

Answer 2

really fun mums try making pies

risk bearing, financial, managerial, technical, marketing, purchasing

Question 2

what are the 6 internal economies of scale?

Answer 2

risk bearing
financial
managerial
technical
marketing
purchasing

Question 3

what happens when we have managerial economies of scale?

Answer 3

we hire specialist managers

with specific skill sets

to increase the productivity to be more eficient

get costs down

productivity and quantity rise quicker than costs so AC are brought down

Question 4

What happens when we have technical economies of scale?

Answer 4

Bring in specialist machinery as firms get larger

Boost productivity

Factory is more efficient

Greater output

Lower costs

Reduced AC

Question 5

When do we have purchasing economies of scale?

Answer 5

Firms grow and bulk buy raw materials

Get unit discounts

Costs are rising but quantity rises faster within the company

Costs are spread over a wider amount of output

Question 6

When do we have marketing economies of scale?

Answer 6

Bulk buying advertising as firms grow larger

Spreading advertising costs on a larger range of output

Total costs rising slower than quantity

Question 7

When do we have financial economies of scale?

Answer 7

Negotiating Lower rates of interest on loans from the bank

Costs are rising but spread across a larger range of output

Total costs rising but quantity is quicker

Question 8

When do we have financial economies of scale?

Answer 8

Negotiating Lower rates of interest on loans from the bank

Costs are rising but spread across a larger range of output

Total costs rising but quantity is quicker

Question 9

When do we have risk bearing economies of scale?

Answer 9

When firms can spread their opportunity cost risks across a larger range of output

Costs are rising but output is rising faster

Therefore lower average cost

Question 10

When do we have risk bearing economies of scale?

Answer 10

When firms can spread their opportunity cost risks across a larger range of output

Costs are rising but output is rising faster

Therefore lower average cost

Question 11

When do we have external economies of scale?

Answer 11

Not in the business but within the industry

Question 12

When do we have external economies of scale?

Answer 12

Not in the business but within the industry

Question 13

What are the three external economies of scale?

Answer 13

Better transport infrastructure

Component suppliers more closer to

Research and development firms move closer

Question 14

What’s important about the external EoS better transport infrastructure?

Answer 14

New roads airport railway

Reduces costs

To sell goods and access raw materials

Total costs decrease decreasing average costs

Question 15

What’s important about the external EoS component suppliers move closer?

Answer 15

Cuts costs of transporting raw material components

Question 16

What’s important about the external EoS R + D firms moving closer?

Answer 16

You can use their R + D and improve technology

Reduces total costs

Reducing average costs

Question 17

What is diseconomies of scale?

Answer 17

Increase in LRAC as output increases

Total costs are rising faster than output

(Increase in costs!!)

Question 18

How do you remember diseconomies of scale?

Answer 18

3 C’s and a M
Control
Communication
Coordination
Motivation

Question 19

What are the diseconomies of scale?

Answer 19

Control

Communication

Coordination

Motivation

Question 20

Why is control a diseconomies of scale?

Answer 20

Business is larger

Harder for managers to control work force

Workers slack off more

Decreases productivity

Quantity falls/suffers

Total costs rises faster than quantity

Question 21

Why is communication a diseconomies of scale?

Answer 21

Harder to spread messages through the company quickly

Takes time and effort

Waste of time = waste of productivity

Question 22

Why is coordination a diseconomies of scale?

Answer 22

Becomes much more difficult to coordinate different parts of the business

As you get larger

There for productivity suffers

Total costs rise faster than quantity

Question 23

Why is motivation a diseconomies of scale?

Answer 23

As the business grows in size

Workers feel like they are only a small part of the firm and replaceable

Decreases workers motivation as they do not think they hold much value in the company

Productivity falls

Costs rise faster than quantity