Chapter 5 - cost behaviour Flashcards
limits in the short term
constrained by scale of operation = inefficiencies when volume is increased
eg higher wages with more factory workers
long term abilities
in long run firm can adjust permanently to higher output levels by investment in new resources for greater efficiency
= lower ac
benefit of economies of scale
acts as a barrier to entry for new firms
internal vs external economies of scale
INTERNAL = within a firm
EXTERNAL = growth in industry
types of internal economies of scale
trading
financial
managerial
technical
what is a trading economy of scale
- buying economies = reduces cost of material purchases through bulk buy
- bulk selling = savings in ad/distribution costs
- economies of scope = cost savings through wider range of products without extra costs
what is financial economy of scale
may be cheaper or easier for large firms to raise finance
investors accept lower returns for lower risk
larger firms are less risky because they have:
- valuable assets to pledge as security
- high levels of market power
- less reliance on a single market/product
what is technical economy of scale
arise in production process
many industries have a high proportion of fixed costs so have a cost advantage as this can be spread over more units
may be possible for smaller company to invest in lower amount of fixed costs but sometimes not possible as investment can’t be subdivided so such assets are indivisible eg robotic machinery in car production
what is division of labour
as a firm increases in size it can break down jobs into tasks assigned to separate individuals
benefit of division of labour
= increased productivity by creating specialists
how does division of labour cut costs
- less time to learn
- successful allocation
- learning effects enjoyed
- time isn’t wasted between tasks
what are dimensional economies of scale
arise from relationship between volume of output and size of equipment
what are managerial economies of scale
- centralisation of functions like admin, marketing
- more efficient use of management
- specialist staff save money
examples of external e.o.s
- gov may provide educational services for new entrants in industries
- specialised support that industries develop
- government assistance granted to industries promising lots of jobs
reasons for diseconomies of scale
- long chain of command
- deteriorating morale
- asymmetric info
- increased level of bureaucracy (red tape)
minimum efficient scale
lowest level of output to achieve minimum average cost
implication of mes
sometimes mes is so high = a natural monopoly
level of mes influences number of firms that can compete efficiently in an industry
when does a low mes occur
industries with low fixed cost = low mes
types of growth
organic = internal
external = acquisition or merger
what are the types of integration
HORIZONTAL = same line of business, creates internal eos
VERTICAL = different stages of production, backward vertical is when firm merges with supplier. forward vertical is when firm merges with customer
CONGLOMERATE = diversification, different line of business
what methods allow smaller firms to survive
- outsourcing = transferring activity inside firm to external contractor
- offshoring = costs of operation in other countries can be cheaper
- network organisations = when firm has outsourced most activities
other strategies
- shared service centre = provision of a service by one part of the firm where it has been previously found in more than one part of that firm
- flexible staffing = eg temp staff or zero hour contracts
