economies and diseconomies of scale

Question 1

what is the nature of economies of scale?

Answer 1

• different firms have different economies of scale/ minimum efficient scale depending on the good or service they produce
• benefits of growth is different

Question 2

draw the economies of scale diagram and explain it

Answer 2

as firms inc. quantity produced, cost for each produced is lower until production goes past the minimum efficient scale

Question 3

what is the minimum efficient scale and where is it on the diagram?

Answer 3

minimum efficient scale- lowest quantity where a firm can fully benefit from economies of scale

Question 4

recall the types of economies of scale

Answer 4

Richards- risk bearing
Mum- managerial
Flies- financial
Past- purchasing
The- technical
Moon- marketing

Question 5

what is technical economies of scale?

Answer 5

specialist machinery/ capital

Question 6

what is purchasing economies of scale?

Answer 6

bulk buy resources= cheaper

Question 7

what is managerial economies of scale?

Answer 7

can get experts to manage particular parts of business
they can do that more productively as they’d know how to do it

Question 8

what is advertising economies of scale?

Answer 8

advertising costs spread across a large level of output

Question 9

what are financial economies of scale?

Answer 9

larger firms face lower interest rates

Question 10

what are risk bearing economies of scale

Answer 10

large businesses can diversify which markets and goods they sell in
profits from large firms can be used to buy into other sections

Question 11

what are the arguments in favour of a horizontal merger?

Answer 11

• economies of scale
  similar raw materials needed
  lower interest rate
  specialist equipment bought + fully utilised e.g Lorry may be full instead of half full
  diversification of risk
• reduced competition
  inc market share
  inc prices→ inc profit
• rationalism
  removal of duplicate roles within both businesses
  lowers cost of p
• synergy
  skills/ workers complement each other
  inc. innovation + productivity

Question 12

what are the arguments against a merger?

Answer 12

• confusion of brand image
• reduced flexibility
• lack of synergy
• diseconomies of scale
• slow decision making
• 25% of market limit for a firm- CMA could stop a merger
• infighting between workers

Question 13

what is diseconomies of scale?

Answer 13

As quantity produced rises, so does average cost

Question 14

recall the types of diseconomies of scale

Answer 14

alienation
bureaucracy
communication

Question 15

why does alienation occur?

Answer 15

as firms grow, workers lose motivation due to feeling less valued

e.g cant see the outcome of their work

Question 16

why is bureaucracy a diseconomy of scale?

Answer 16

excessive complicated administrative procedure in large firms

Question 17

why is communication a diseconomy of scale?

Answer 17

in large businesses there are many people through which messages may need to be conveyed→ slow and inefficient
→ message may be misconveyed

Question 18

what are internal economies of scale

Answer 18

if the firm grows, the cost benefits it recieves
e.g purchasing, technical etc

Question 19

what are external economies of scale

Answer 19

if an industry as a whole grows its benefits it recieves
e.g if a group of businesses are nearby to their supply then itll lower transportation costs
external economies of scale cant be controlled by the individual businesei

Question 20

give an example of a demerger and what type of merger was it

Answer 20

pay pal and eBay
conglomerate