ch5 Flashcards
How is Diseconomies of Scale defined?
Rising long-run average costs as a business expands beyond its minimum efficient scale.
How is Economies of Scale defined?
The reduction in average costs enjoyed by a business as output increases.
How is External Economies of Scale defined?
The cost reductions available to all businesses as the industry grows.
How is Internal Economies of Scale defined?
The cost reductions enjoyed by a single business as it grows.
How is Minimum Efficient Scale defined?
The output that minimises long-run average costs.
What is Growth?
Growth is a measured increase in the key indicators of a business, such as sales revenue, units sold or profits.
It can also be viewed in the context of asset ownership or increases in number of employees.
What is Economies of Scale?
the size of a business has a major impact on average costs of.product economies of scale is when a increase in the size of the business can lead to a decrease in the average cost per unit
In this instance, a business can negotiate better deals against smaller rivals or suppliers who want business.
What are Internal Economies of Scale?
Internal economies arise within the business as a result of the growth of the firm.
Purchasing and marketing economies
Technical economies
Specialisation economies
Financial economies
Risk bearing economies
What are Purchasing and Marketing Economies as part on Internal Economies of Scale?
Large firms are likely to get better rates when buying raw materials and components in bulk
Also administration costs involved do not rise in proportion
A number of marketing economies exist. A large company may find it cost-effective to acquire its own fleet of vans and lorries
What is Technical Economies as part of Internal Economies of Scale?
Technical economies arise because larger plants are often more efficient
Principle of increase dimensions
-the capital costs and the running costs of plants do not rise in proportion to their size increasing size may mean doubling output but not doubling cost therefore average costs with fall
may switch to mass production techniques flow production allows greater use of specialised machinery which is more efficiency as labour is replaced by capital
law of multiples
as a businesses expand its can buy more slow machines to match the capacity of faster machines, this way as they operate together they are running at full capacity
What is Specialisation and Managerial economies as part of Internal Economies of Scale?
As the firm grows it can afford to employ specialist managers finance, marketing, production etc.
if a business employs a specialist in these fields efficiency may improve and average costs fall
if employed in a small firm they would be an indivisibility
What is Financial Economies as part of Internal Economies of Scale?
Large firms have a wider variety of sources from which they can raise funds from compared to the like of a sole trader
Very large firms will often find it easier to persuade institutions to lend them money since they will have large assets to offer as security
large firms borrowing very large amounts of money can often gain better interest rates
What is Risk-bearing economies as part of Internal Economies of Scale?
As a firm grows it may well diversify to reduce risk e.g. more products, new markets
Large businesses can also reduce risk by carrying out research and development which may give them a competitive edge over smaller rivals
What are External Economies of Scale?
External economies usually occur when there is a growth in the industry the business operates in.
Labour
Ancillary services
Co-operation
Disintegration
What is Labour in External Economies of Scale?
The concentration of firms may lead to the build-up of a labour force equipped with the skills required by the industry
Training costs may be reduced if workers have gained skills at another firm in the same industry
Local schools and colleges, or even local government, may offer training courses which are aimed at the needs of the local industry
