E 3.2.1 growth*

Question 1

economies of scale definition

Answer 1

the reductions in unit costs caused by operating on a larger scale

Question 2

internal economies of scale definition

Answer 2

the cost reduction enjoyed by a single business as it grows

Question 3

external economies of scale definition

Answer 3

the cost reduction available to all businesses as the industry grows

Question 4

objectives of growth

Answer 4

• to achieve economies of scale- reduction in average cost enables business to charge lower prices and have a higher profit margin.– technical: investing in new material-initial cost of buying it is a drawback but in the long-term it would make the business more efficient and sell more products= increase in profitability
• increased market power over customers and suppliers
• increased market share and brand recognition
• increase profitability

Question 5

external economies of scale

Answer 5

• labour- a concentration of firms in one area may encourage a build-up of skilled labour
• technical- ability to buy in specialist, more efficient machinery and technology
• cooperation- where firms are concentrated together, they are more likely to work together and collaborate

Question 6

internal economies of scale

Answer 6

• purchasing-negotiating cheaper unit costs on suppliers by bulk-buying.
• risk-bearing- diversifying and carrying out research and development to reduce risk= competitive edge over smaller rivals

technical- ability to buy in specialist, more efficient machinery and technology

• managerial- better management resulting from the ability to employ specialists
• financial- larger businesses are seen by lenders as more reliable/worthy of capital due to their size.

Question 7

example of economies of scale

Answer 7

when baking a victoria sponge cake, it is likely that you will have to buy the ingredients in bulk packaging. However, the more Victoria sponges you bake, the cost of the ingredients are spread across those cakes creating economies of scale

Question 8

problems arising from growth

Answer 8

• diseconomies of scale: the inefficiencies related to growing as a business that can lead to upwards pressure on unit costs (can be due to lack of control)
• overtrading: expansion means that a business must spend, whether this is higher levels of stock or non-current assets—-This increases cash outflows—-Cash inflows will take time to arrive: manufacturing takes time and stock of finished goods must be sold- often on trade credit—-The company must wait for customers to pay up before cash flow improves—-If a business runs out of cash needed to run the business, it will be in trouble.