Economies and Diseconomies of Scale Flashcards
What are internal economies of scale?
Increase in productive efficiency (average costs) caused by increases in output
How do fixed costs relate to economies of scale?
Fixed costs can be spread over high outputs, higher output leads to less average fixed costs. Therefore increasing output reduces average costs in this way
Name the 5 types of internal economies of scale
- purchasing
- technical
- specialisation
- marketing
- financial
What are purchasing (bulk buying) economies of scale?
Large firms exploit their monopsony (ability to control costs) power. A large firm is able to discount the price from suppliers as they buy multiple units at once, the seller wants to sell all of their stock and so is unlikely to reject the opportunity to do so.
What are technical economies of scale?
Capital is a fixed cost, therefore the cost of capital can be spread over high outputs thus reducing average costs
What is specialisation economies of scale?
Specialised workers with high levels of knowledge are paid on salaries which is a fixed cost and can be spread over high outputs
AND
Division of labour occurs as higher outputs mean more employees are employed so the process can be broken down and as economies of scale are long run diminishing returns don’t occur. Therefore more output means more labour so more specialisation and lower average costs
What is marketing economies of scale?
Marketing is a fixed cost therefore it can be spread over high outputs reducing average costs
What is financial economies of scale?
Loans are a fixed cost so it can be spread over high outputs and reduce average costs
AND
Banks face less risk lending money to large firms as it is more likely it will be paid back. Therefore large firms get loans at a cheap interest rate which reduces average costs
What are internal diseconomies of scale?
Decreases in productive efficiency due to increases in output
What are the 4 types of internal diseconomies of scale?
- Poor communication
- Managerial
- Motivational
- Capitalisation
What is poor communication diseconomy of scale?
Bigger firms have problems with communication which leads to mistakes and increased average costs
What is managerial diseconomy of scale?
Managers become over burdened and stressed with many people to manage which creates mistakes and increases average costs
What is motivational diseconomy of scale?
If there are many people to manage then managers may not notice if workers are working hard or not. Therefore there is no incentive to work hard which reduces productivity of workers and increases average cost
What is capitalisation diseconomy of scale?
A firm may buy too much capital in relation to demand, therefore the fixed cost of capital cannot be covered and average costs rise
What are external economies of scale?
Changes external to the firm or market which will change average costs
