6) economies and diseconomies of scale Flashcards
what are economies of scale?
reduction in LRAC as output increases
what are the two types of economes of scale
internal
external
when do we have internal economies of scale
within a businesses control which can be exploited as they grow bigger
whats the pneumonic to remember the internal economies?
really fun mums try making pies
risk bearing, financial, managerial, technical, marketing, purchasing
what are the 6 internal economies of scale?
risk bearing
financial
managerial
technical
marketing
purchasing
what happens when we have managerial economies of scale?
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
What happens when we have technical economies of scale?
Bring in specialist machinery as firms get larger
Boost productivity
Factory is more efficient
Greater output
Lower costs
Reduced AC
When do we have purchasing economies of scale?
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
When do we have marketing economies of scale?
Bulk buying advertising as firms grow larger
Spreading advertising costs on a larger range of output
Total costs rising slower than quantity
When do we have financial economies of scale?
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
When do we have risk bearing economies of scale?
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
When do we have external economies of scale?
Not in the business but within the industry
What are the three external economies of scale?
Better transport infrastructure
Component suppliers more closer to
Research and development firms move closer
What’s important about the external EoS better transport infrastructure?
New roads airport railway
Reduces costs
To sell goods and access raw materials
Total costs decrease decreasing average costs
What’s important about the external EoS component suppliers move closer?
Cuts costs of transporting raw material components
