Economies and Diseconomies of Scale

Question 1

Economies of Scale

Answer 1

falling average due to expansion

Large firms can usually produce goods more cheaply than smaller firms -> the size of the firm has an important effect on the average costs of production. As firms increases its size, average costs FALL

Question 2

Internal economies of scale

Answer 2

are the cost benefits that an individual firm can can enjoy when it expands

Question 3

Reasons why costs fall

Answer 3

-> PURCHASING ECONOMIES
Large firms that buy lots of resources get cheaper rates as the suppliers offer discounts to firms that purchase raw materials and components in bulk

-> MARKETING ECONOMIES
e.g. it can be cost-effective for a large firm to run its own delivery vehicles. For a large firm, with lots of deliveries to make, this would be cheaper than paying the distributor

-> TECHNICAL ECONOMIES
Larger factories are often more efficient than smaller ones. There could be more specialisation and more investment in machinery

-> FINANCIAL ECONOMIES
Large firms have access to money cheaply while having a wider variety of sources to choose from

-> MANAGERIAL ECONOMIES
As firms expand, they are able to afford specialist managers resulting in improving overall efficiency and falling the average costs

-> RISK-BEARING ECONOMIES
Larger firms are more likely to have wider product ranges and sell into a wider variety of markets, reducing risks in the business

Question 4

External Economies of Scale

Answer 4

cost benefits that all firms in an industry can enjoy when the industry expands -> sometimes all firms enjoy FALLING AVERAGE COSTS as the whole industry grows

Question 5

Characteristics of External Economies of Scale

Answer 5

-> SKILLED LABOUR
If the industry is concentrated on one area, there may be a build-up of labour with the skills and work experience required by the industry resulting reducing training costs

->INFRASTRUCTURE
If a particular industry dominates the region, roads, railways, ports, buildings or other facilities will then be shaped to suit the industry’s needs

-> ACCESS TO SUPPLIES
An established industry in the region will encourage suppliers in that industry to set up close by. Specialist marketing, cleaning, banking, waste disposal, distribution, maintenance and component suppliers are likely to be attracted to that area

-> SIMILAR BUSINESSES IN THE AREA
When firms in the same industry are located close to each other, they are likely to cooperate together so they all gain

Question 6

Diseconomies of Scale

Answer 6

rising average costs when a firm becomes too big