Chapter 5- Cost Behaviour Flashcards
What does economies of scale mean?
A reduction in cost per unit due to an increase in the size of the firm or of the industry.
What is internal economies of scale and examples?
Occurs through its own internal growth or potentially through growth by acquisition- this eos is under control by management.
e.g trading, financial, managerial, technical
What is trading eos?
buying economies (reduces cost)
bulk selling (savings in distribution and advertising costs)
economies of scope (cost savings when offering a wider range of products)
What is financial eos?
can be cheaper and easier for large firms to raise finance.
Investors accept lower returns if risk is lower.
larger firms have higher market power, less reliance on a single product or marker.
What is technical eos?
Fixed costs (such as in manufacturing) can be spread across a larger number of units (cost advantage).
What does the division of labour mean?
as a firm increases in size it can break down jobs into individual tasks that can be assigned to separate individuals.
How can the division of labour help reduce unit costs?
tasks can be allocated to staff with the greatest aptitude for the task
learning effects will be enjoyed as staff members learn and find ways to perform their task more quickly
Time is not wasted with staff switching in between tasks
Managerial economies of scale:
Specialist staff save money because large firms can justify employing specialist staff for IT, HR, accountancy etc and their skills can be fully utilised in their specialist areas
What does external eos mean?
A fall in cost per unit due to a growth in the size of the industry.
What are some reasons for possible internal diseconomies of scale?
Morale and motivation amongst staff decreases- may be conflict in different departments
Senior management may struggle to understand all sufficient information to make good quality decisions
What is a reason for external diseconomies of scale?
if shortage of materials or labour occurs then this might lead to higher raw material and labour costs.
What does minimum efficient scale (MES) mean?
the lowest level of output at which a firm can achieve its minimum average cost
MES in different sectors:
in industries where fixed costs are low, MES will be low (e.g software and apps)
where fixed costs are higher MES will be higher (e.g aircraft manufacturing and mining)
MES in regards to natural monopoly:
Sometimes MES is so high that is leads to natural monopoly meaning the forces of competition drives all but one firm from the industry. So level of MES influences the number of firms that can compete efficiently in the industry.
What is a concentration ratio?
The extent to which large firms dominate an industry.
Normally involves calculating the percentage of total output in an industry that comes form the largest firms (often the largest 3, 4 or 5)
Methods of growth:
organic- grow internally
acquiring- process of buying another company (could be referred to as an integration strategy)
Types of integration:
Horizontal- merging or takeover with business on the same level (likely to create internal eos and reduce competition)
Vertical- merging or takeover that operate at different stages of production
Backward vertical- when a firm merges with a supplier
Forward vertical- where a firm merges with a customer (e.g food supplier merging with a food retailer)
Conglomerate (diversification)- merger of a firm in a different line of business (e.g lenova who do laptops with Motorola who do mobile phones in 2015)
Ways small businesses can survive:
Outsourcing- getting another business to do a job for you. If a firm has outsourced most of its activities it is called a network organisation.
Offshoring- basing some processes in other countries to reduce costs
Other strategies:
Shared service centre- refers to a dedicated unit (including people, processes and technologies) that is structured as a centralized point of service and is focused on defined business functions.
Flexible Staffing- use of a variety of flexible working arrangements like the use of temporary and full time staff on zero - hour contractors staff
