Economies and diseconomies of scale Flashcards
what can a firm increase as it grows ?
its scale of output , generating efficiencies that lower its average costs pf production
How does economies of scale help large firms
lower their costs or production beyond what small firms are able to achieve
what happens as a firm continues to increase its scale of output ?
it will reach a point where its average costs will start to increase this is due to diseconomies to scale
economies of scale are the reason that firms generate ?
increasing returns to scale in the long run
diseconomies of scale are the reason that firms generate?
increasing returns to scale in the long run
what are the types of internal economies of scale
-financial economy of scale
-managerial economy of scale
-marketing economy of scale
-purchasing economy of scale
-technical economy of scale
-risk bearing economy of scale
what is financial economy of scale ?
large firms often receive lower interest rates on loans than smaller firms , as they are perceived as less risky.A cheap loan lowers AC.
what is managerial economy of scale ?
occurs when large firms can employ specialist managers who are more efficient at certain tasks , and this efficient lowers the AC
Managers in small firms often have to fulfil multiple roles and are less specialised
what is marketing economy of scale
Large firms spread the cost of advertising over a large number of sales, and this reduces the AC. They can also reuse marketing materials in different geographic regions, which further lowers the AC
what is purchasing economy of scale
This occurs when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers the AC
what is technical economy of scale
Occur as a firm is able to use its machinery at a higher level of capacity due to the increased output, thereby spreading the cost of the machinery over more units and lowering the AC
what is risk bearing economy of scale ?
It occurs when a firm is able to spread the risk of failure by increasing its numbers of products, i.e greater product diversification; less failure lowers AC
when does external economies of scale occur?
occur when there is an increase in the size of the industry in which the firm operates
The firm is able to benefit from lower average costs generated by factors outside the firm.
what are the types of external economies of scale?
geographical cluster
trasnport links
skilled labour
favourable legislation
what is geographical cluster?
As an industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business. This lowers the AC
what is transport links ?
Improved transport links develop around growing industries in order to help get people to work & to improve transport logistics. This lowers the AC
what is skilled labour
An increase in skilled labour can lower the cost of skilled labour, thereby lowering the AC. The larger the geographic cluster, the larger the pool of skilled labour
what is favourable legislation?
This often generates significant reductions in AC as governments support certain industries in order to achieve their wider objectives
causes of diseconomies of scale
-management economy of scale
-communication diseconomy of scale
-geographical diseconomy of scale
-cultural diseconomy of scale
how does management diseconomy of scale occur ?
Occur when managers work more in their own interest than in the interest of the firm, e.g managers become territorial and obstructive thus reducing efficiency and increasing the AC
how does communication diseconomy of scale occur ?
Occur when a firm with multiple layers of management & perhaps in multiple geographic locations, struggle to communicate quickly & efficiently leading to slow responses & increased AC
how does geographical diseconomy of scale occur ?
Occur when a firm has widespread bases of operations & this leads to logistical and communication challenges which can raise the AC
how does cultural diseconomy of scale occur?
Occur when a firm expands into foreign markets in which workers have very different cultural work/productivity norms which can raise the AC
