economics (S) theme 2 part 1.1 Flashcards
what are econmies of scale
these occur when a firm becomes larger average cost of production falls as output increases
what are the five econmies of scale
Purchasing econmies
Technical econimies
Managerial econmies
Financial econmies
Diseconmies of scale
Which are internal econmies of scale
Purchasing, technical, managerial and financial
What are purchasing econmies of scale
Purchasing econmies of scale are discounts for bulk buying
They are able to secure lower prices if they purchase a large amount
What are techincal econmies of scale
Technical econmies are through using specialist usually expensive capital
Larger firms are often able to buy more expensive, bigger and efficient machinery
They are able to spread fixed costs over a greater output
They are able to obtain lower costs per unit, which increases competitiveness
Larger firms can also invest more money into research and development
makes them more efficient
What are managerial econmies of scale
Managerial econmies of scale are employing specialist labour e.g lawyers and accountants
Division of labour allows employees to focus on specific jobs which makes them more qualified, more experienced and more efficient
Compared to a manger of a small firm who would oversee accounts and also human resource issues
What are financial econmies of scale
Finantial econmies are when a bank is more likely to lend loans cheaper to bigger firms as they are less risk
What does risk bearing mean
When a firm becomes bigger they can expand into different ranges of production as they can fall back on other products if one fails
What are external econmies of scale
External econmies of scale effect all firms within the same region
It is a fall in average costs due to factors outside the controll of the firm
They will create positive externalities e.g improved transport infrastructure, a pool of skilled workers, more advanced communication systems
What are diseconmies of scale
Diseconmies of scale occur when there are an increase in average total costs as the scale of production increases
How do diseconmies of scale take form
They take form of internal communication because larger firms find it harder to communicate effiecently , also increased costs for communication. Compared to small firms where theycan communicate efficently with all memebers of their workforce
Also co-ordination larger firms find it harder to manage the increased number of customers and workforce.
Harder to delegate to and motivate workers
How are larger firms discouraged
By higher average costs, this discourages them from growth beacuse it could lead to fall in profits/create loses
The firm has to weigh up benefits e.g larger market share vs overtrading where they take too many orders
How does econmies of scale help firms
As a firm grows in size they are able they are able to increse their market power which leads to higher prices and supernormal profits
How does increased market share help a firm
It develops and maintains customer loyalty
it allows them to charge higher prices
How does incresed market share effect econmies of scale
Bulk buying allows them to reduce costs
They can invest in advertising and charge higher prices
