Business costs, revenues, profit

Question 1

What are economies of scale?

Answer 1

Economies of scale refer to falling average costs due to expansion.

Question 2

What are the advantages of economies of scale?

Answer 2

• lower costs per unit —> lower prices for consumers resulting in higher profits
• increased market power —> better negotiations with suppliers therefore being able to set higher prices for its products
• investment in technology —> increase efficiency and productivity leading to more output hence meaning more profit
• diversification —> More risk bearing
• greater access to finance

Question 3

What are the disadvantages of economies of scale?

Answer 3

• Increased fixed costs —> when they buy more machinery
• bad customer service —> may be important in certain industries
• more regulations —> increases costs for the firm —> bureaucracy
• May lead to diseconomies of scale —> lower incentives —> quality deters—> employees may leave, communication problems,

Question 4

Different types of economies of scale?

Answer 4

Managerial
Technical
Marketing economies
External
Risk-Bearing

Question 5

Evaluation points of economies of scale questions

Answer 5

• problems may occur
• depends on the outcome in the future, whether it’s E.O.S or D.O.S
• only can be able to exploit economies of scale if a firm increases scale of production