Business Costs and Economies of Scale Flashcards
Define the term ‘revenue’.
The income earned by a business from selling their product to customers
What is the formula for total revenue?
Total Revenue = Starting Price x Quantity Sold
What is the formula for total costs?
Total Costs = Fixed Costs + Variable Costs
What is the formula for average costs?
Average Costs = Total Costs ➗ Quantity Produced
What is the formula for profit/loss?
Profit/Loss = Total Revenue - Total Costs
Define the term ‘fixed costs’.
Costs that don’t vary with output and have to be paid even if the business produces nothing
Define the term ‘variable costs’.
Costs that will increase as the firm expands output
Define the term ‘economies of scale’.
The reduction of a firm’s average costs as it increases output and becomes more efficient
What is the difference between internal and external economies of scale?
Internal - due to firm itself increasing in size
External - due to external/industry/market factors
What are the 6 internal economies of scale?
Risk-Bearing Financial Managerial Technical Marketing Purchasing
What are the 3 benefits of economies of scale?
Increase in profitability
Firms can lower prices - attract customers and increase market share
Firms can invest in R&D - become more competitive
How might technical economies of scale reduce average costs (3 steps)?
- More efficient machinery
- Output is increased
- Cost is spread over units
How might managerial economies of scale reduce average costs (2 steps)?
Specialist managers being hired
Their skills and ideas (OR design/use of ICT control systems) lead to increased production
In what 2 ways might marketing economies of scale reduce average costs?
Large organisations can hire specialist marketing staff - can negotiate discounts when bulk-buying
Advertising costs can be spread over more units produced
In what 2 ways might financial economies of scale reduce average costs?
Lower interest rates on loans due to firm’s financial power and stability
Raising extra capital to invest in improving the production process - eg. selling shares
How might risk-bearing economies of scale reduce average costs?
Manufacturers selling to many international markets and with a wide product range can spread their risk
How might purchasing economies of scale reduce average costs (2 steps)?
- Large firms bulk-buy - buy lots of resources
2. Suppliers give discounts for bulk purchases - reduces cost of production
How might skilled labour reduce average costs (2 steps)?
- When identical businesses locate near to each other, there will be a bigger number of skilled staff in one area
- Training and recruitment costs will be lower for them
What are the 4 external economies of scale?
Skilled labour
Infrastructure
Ancillary services
Cooperation
How might infrastructure reduce average costs (2 steps)?
- More infrastructure is likely to be provided in an area where more businesses are located (eg. railways, roads, airports)
- Allows suppliers to provide and customers to receive goods and services quicker
How might ancillary services reduce average costs (2 steps)?
- They are other businesses that set up to support a particular industry (eg. laundromat near hotels)
- Costs will be lower for all services
How might cooperation reduce average costs?
Businesses in the same industry may cooperate with each other to ensure reduced costs
Eg. if one hotel is full, they may contact another to fill each other’s rooms
What are diseconomies of scale?
Disadvantages a firm gains from becoming so large that its average costs start to rise
What are the 3 diseconomies of scale?
Bureaucracy
Staff Relations
Control and Coordination
