Business Costs and Economies of Scale

Question 1

Define the term ‘revenue’.

Answer 1

The income earned by a business from selling their product to customers

Question 2

What is the formula for total revenue?

Answer 2

Total Revenue = Starting Price x Quantity Sold

Question 3

What is the formula for total costs?

Answer 3

Total Costs = Fixed Costs + Variable Costs

Question 4

What is the formula for average costs?

Answer 4

Average Costs = Total Costs ➗ Quantity Produced

Question 5

What is the formula for profit/loss?

Answer 5

Profit/Loss = Total Revenue - Total Costs

Question 6

Define the term ‘fixed costs’.

Answer 6

Costs that don’t vary with output and have to be paid even if the business produces nothing

Question 7

Define the term ‘variable costs’.

Answer 7

Costs that will increase as the firm expands output

Question 8

Define the term ‘economies of scale’.

Answer 8

The reduction of a firm’s average costs as it increases output and becomes more efficient

Question 9

What is the difference between internal and external economies of scale?

Answer 9

Internal - due to firm itself increasing in size

External - due to external/industry/market factors

Question 10

What are the 6 internal economies of scale?

Answer 10

Risk-Bearing
Financial 
Managerial
Technical
Marketing
Purchasing

Question 11

What are the 3 benefits of economies of scale?

Answer 11

Increase in profitability
Firms can lower prices - attract customers and increase market share
Firms can invest in R&D - become more competitive

Question 12

How might technical economies of scale reduce average costs (3 steps)?

Answer 12

1. More efficient machinery
2. Output is increased
3. Cost is spread over units

Question 13

How might managerial economies of scale reduce average costs (2 steps)?

Answer 13

Specialist managers being hired

Their skills and ideas (OR design/use of ICT control systems) lead to increased production

Question 14

In what 2 ways might marketing economies of scale reduce average costs?

Answer 14

Large organisations can hire specialist marketing staff - can negotiate discounts when bulk-buying
Advertising costs can be spread over more units produced

Question 15

In what 2 ways might financial economies of scale reduce average costs?

Answer 15

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

Question 16

How might risk-bearing economies of scale reduce average costs?

Answer 16

Manufacturers selling to many international markets and with a wide product range can spread their risk

Question 17

How might purchasing economies of scale reduce average costs (2 steps)?

Answer 17

1. Large firms bulk-buy - buy lots of resources

2. Suppliers give discounts for bulk purchases - reduces cost of production

Question 18

How might skilled labour reduce average costs (2 steps)?

Answer 18

1. When identical businesses locate near to each other, there will be a bigger number of skilled staff in one area
2. Training and recruitment costs will be lower for them

Question 19

What are the 4 external economies of scale?

Answer 19

Skilled labour
Infrastructure
Ancillary services
Cooperation

Question 20

How might infrastructure reduce average costs (2 steps)?

Answer 20

1. More infrastructure is likely to be provided in an area where more businesses are located (eg. railways, roads, airports)
2. Allows suppliers to provide and customers to receive goods and services quicker

Question 21

How might ancillary services reduce average costs (2 steps)?

Answer 21

1. They are other businesses that set up to support a particular industry (eg. laundromat near hotels)
2. Costs will be lower for all services

Question 22

How might cooperation reduce average costs?

Answer 22

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

Question 23

What are diseconomies of scale?

Answer 23

Disadvantages a firm gains from becoming so large that its average costs start to rise

Question 24

What are the 3 diseconomies of scale?

Answer 24

Bureaucracy
Staff Relations
Control and Coordination

Question 25

What are the 3 diseconomies of scale?

Answer 25

Bureaucracy
Staff Relations
Control and Coordination

Question 26

How might bureaucracy increase average costs (2 steps)?

Answer 26

1. Lots of paperwork and form-filling needs to be done as firms grow larger
2. May take up time and resources

Question 27

How might staff relations increase average costs (2 steps)?

Answer 27

1. May be harder for managers and staff to communicate as a firm becomes bigger
2. May lead to demotivated and less productive staff

Question 28

How might control and coordination increase average costs?

Answer 28

A business with many employees may be hard to control

More managers needed