Chapter 48- Growth

Question 1

Economies of scale

Answer 1

• The reductions in average costs enjoyed by a business as
  output increases

-Typically, there is a range of output over which average costs fall as output rises, over this range, larger businesses have a competitive advantage over smaller businesses. They enjoy economies of scale.

Question 2

Internal economies of scale-

Answer 2

•Purchasing and marketing economies-e.g. bulk buying
gives better rates

•Technical economies- as you get bigger you can get more
machines
– the capital costs and the running costs of plants do not rise in proportion to their size
– for example, the capital cost of a double decker bus will not be twice that of a single decker bus. This is because the main cost does not double when the capacity of the bus doubles - this is called the principle of increased dimensions

Businesses often employ a variety of machines which have different capacities – a slow machine may increase production time – as the firm expands and produces more output, it can employ more of the slower machines in order to match the capacity of the faster machines – this is called the law of multiples

• Specialisation and managerial economies- as it grows it can afford specialized managers etc.
• Financial economies- larger firms have the advantage that they can get loans etc. more easily – raising capital
• Risk bearing economies- it can afford to diversify to spread risk e.g. enter other markets

Question 3

External economies of scale-

Answer 3

• Labour- concentration of businesses means that there are more skilled labourers in the area – training costs may be reduced if workers have gained skills at another firm in the same industry
• Ancillary and commercial services- you attract small firms as it is an established industry
• Co-operation- firms in a concentrated area are likely to help each other – join funds for research
• Disintegration-occurs when production is broken up e.g. a car manufacture gets each part built in a different place

Question 4

Increased market power

Answer 4

As businesses get bigger they become more dominant – as a result rivals are left with smaller market share and some weaker businesses may be forced to close down – if a business is large enough it may be able to dominate two particular stakeholders

• Customers – a dominant business may be able to charge higher prices if competition in the market is limited – in the absence of choice consumers are forced to pay higher prices – Also, if there is less need to develop new products this means that a dominant firm will not have to meet the costs of expensive and risky innovation.
• Suppliers – sometimes a business can dominate suppliers – e.g. it may be able to force the costs of materials and commercial services down if it buys large quantities from relatively small suppliers – dominant businesses will be in a particularly good position if their suppliers rely heavily on them for their custom.

Question 5

Diseconomies of scale

Answer 5

• Rising long run costs as a business expands beyond its minimum efficient scale – most internal diseconomies are caused by the problem of managing large businesses
• Communication becomes more complicated and co-ordination more difficult because a large firm is divided into departments
• The control and co-ordination of large businesses is also demanding – thousands of employees, billions of pounds and dozens of plants all mean added responsibility and more supervision
• Motivation may suffer as individual workers may become minor part of the total workforce

Question 6

Internal communication

Answer 6

Is the exchange of messages and the flow of information inside a business – between individual workers or between departments

• If a business grows too big there could be an issue with internal communication
• Distortions to information may occur as it is passed through the managerial hierarchy
• At worst it could lead to misunderstanding or disputes which will reduce productivity
• Sometimes recourses might be wasted due to a lack of effective communication or the accidental duplication of recourses

Question 7

Overtrading

Answer 7

If a business grows too fast there is a danger that it might suffer from overtrading – this is more likely to happen to young growing businesses. Overtrading occurs when a business tries to fund a large volume of new business without sufficient recourses.

As a result, is runs out of cash or collapses
- May not have enough capital
- Offers to much trade credit to customers – has to wait a
long time to be paid
- Is operating slim profit margins