Chapter 40: Economies & Diseconomies Of Scale Flashcards
Economies Of Scale
Financial advantages (falling average costs) of producing something in very large quantities.
Diseconomies of scale
Rising average costs when a firm becomes too big.
Internal Economies of Scale
Cost benefits that an individual firm can enjoy when it expands.
External economies of scale
Cost benefits that all firms in the industry can enjoy when the industry expands.
Internal Economies of Scale Examples
Purchasing, Financial, Technical, Risk-brearing, Managerial, Marketing.
External economies of scale examples
Skilled labour, Infrastructure, Ancillary & commercial services, cooperation.
Diseconomies of scale examples
Bureaucracy, Labour Relations, Control & Coordination.
Purchasing Economies
Large firms that buy in bulk get discounts, reducing costs.
Marketing Economies
Large firms save on marketing costs, such as delivery and advertising.
Technical Economies
Larger plants are more efficient due to specialization and machinery investment.
Financial Economies
Large firms get cheaper loans and more financing options.
Managerial Economies
Large firms can afford specialist managers, improving efficiency.
Risk-Bearing Economies
Larger firms reduce risk by diversifying their products and markets.
Skilled Labour
An industry in one area develops skilled labour, reducing training costs.
Infrastructure
Infrastructure develops around an industry, benefiting firms in that area.
Ancillary and Commercial Services
Specialist suppliers and services set up near an industry, reducing costs.
Cooperation
Firms in the same industry collaborate to share costs and resources.
Bureaucracy
Excessive administration and slow decision-making increase costs.
Labour Relations
Poor worker-manager relations can lead to inefficiency and conflicts.
Control and Coordination
Large firms may struggle with coordination, increasing supervision costs.
Lack of Finance
Some businesses cannot secure funding to expand.
Nature of the Market
Certain markets are too small to support large firms.
Lack of Managerial Skills
Owners may lack the skills to manage a large business.
Lack of Motivation
Some owners prefer to keep their business small for personal reasons.
