Economies and Diseconomies of Scale

Question 1

Define economies and diseconomies of scale

Answer 1

Economies of scale- when average costs decrease as production increases

Diseconomies of scale- when average costs increase as production increases

Question 2

Name and describe the 6 types of internal economies of scale

Answer 2

Risk-bearing: Large businesses who operate in a variety of sectors have a decreased risk of failure if one sector fails

Technical: When investment in high quality capital and machinery decreases average costs

Financial: Large businesses are able to get easier access to finances and lower interest rates due to lower risk

Managerial: Large companies can appoint specialist and high quality managers

Marketing: Large companies can spread the costs of advertising over many units

Purchasing: Large firms are able to bulk-buy which decreases the average cost of each unit

Question 3

Name and explain 3 causes of diseconomies of scale

Answer 3

Alienation: In large companies, some workers may feel alienated which could decrease productivity

Bureaucracy: Large companies have a lot of paperwork and legal fees

Communication: large companies have many different layers meaning that it takes a lot of time for information to pass through the company

Question 4

EXTERNAL ECONOMIES IS ON PMT

Answer 4

EXTERNAL ECONOMIES IS ON PMT