Business Growth (CH 1) Flashcards
Define Economies of Scale
Fall in average cost as output increases
How does internal economies of scale occur?
Occurs due to an increase of output of a firm
How does external economies of scale occur?
Occurs due to an increase in output within the industry in which firm operates
Forms of Economies of Scale
- Purchasing economies
- Technical economies
- Managerial economies
- Financial economies
Define Purchasing economies
Discount for bulk-buying
Define Technical economies
Use of specialist, often expensive, capital e.g machines
Define Managerial economies
Specialist Labour
e.g Accountants, Lawyers, Engineers
Define Financial economies
Large firms are seen to be less likely to fail and can borrow money at lower interest rates
Define Diseconomies of Scale
When a firms average cost per unit increases as its output rises
Types of diseconomies of scale occurance
- Operational inefficiencies
- Higher cost of resources
- Managerial inefficiencies
Explain Operation Inefficiencies
- Facilities/ Equipment may become overused leading to wear + inefficiencies
- Managing a large supply chain can result in delays, increased transportation costs and logistics problems
Explain Higher cost of Resources
- As firms grow they may need to pay higher wages to attract/ retain skilled employees
- Large firms may face higher costs for scarce resources due to increased demand
Explain Managerial inefficiencies
- Communication can become less effective, leading to misunderstandings and delays. Therefore managers may higher new employees meaning an increase in cost of advertising, wages
Effect of diseconomies of scale
- Discourages growth as this could lead to a fall in profits / move into a loss
Define Market Power
Extent to which a firm control price and costs in a market
