Chapter 16/17 Flashcards
C, R, P/ Economies+ diseconomies of scale
Define costs.
Expenses the business has to pay for running/starting.
What are the different types of costs?
Fixed, Variable, average and total costs
What are fixed and variable costs?
Fixed- Don’t change as output changes.
Variable- Change as output changes.
What are average and total costs?
Average- Cost per product
Total- Fixed + Variable costs.
What’s the formula for average cost?
Total costs/Total output
What are economies of scale?
Falling average costs due to expansion.
Internal v. external economies of scale.
Internal- When individual firms benefit from lower costs.
External- All firms in the industry in the region benefit from costs.
Why do some firms experience internal economies of scale?
Risk-bearing
Financial
Marketing
Technical
Managerial
Purchasing
What are risk bearing economies and Financial economies?
Risk-bearing: Increases its range of goods, so less risk.
Financial: Can negotiate lower interest rates w/ banks because they’re trustworthy. (low risk)
What are managerial and technical economies?
managerial - the business hires specialist managers, inc. efficiency.
Technical- can buy specialized new technology, inc. efficiency.
What are marketing and purchasing economies?
Marketing- Lower advertising costs
(bulk buy)
Purchasing- Bulk buying products can get you discounts.
What happens when external economies of scale occur?
-More skilled labor in the area, training costs lower
- Infrastructure developments to suit industry.
- Same industry, can support each other.
- Suppliers likely to set-up nearby.
What are diseconomies of scale?
Rising average costs due to the business being too big. Production is inefficient.
Why do diseconomies of scale occur?
-Bureaucracy
-Distance between senior workers and lower level staff too high
-Lack of control
-Communication barriers
What is bureacracy?
Too many departments= too many forms/paperwork. Communication channel too long.
