Economies and diseconomies of scale

Question 1

What is economies of scale?

Answer 1

When unit cost of production falls as the scale of production rises

Question 2

What are the different types of economies of scale?

Answer 2

Risk-bearing
Managerial
Financial
Purchasing
Technical
Marketing

Question 3

What is the risk-bearing economy of scale?

Answer 3

Larger firms can increases the range of their products, and therefore businesses are more able to cope with changes in the market

Question 4

What is the managerial economy of scale?

Answer 4

Larger firms can employ more managers which can lead to an increase in productivity

Question 5

What is the financial economy of scale?

Answer 5

Larger businesses may be able to get larger loans at reduced interest rates

Question 6

What is the purchasing economy of scale?

Answer 6

Businesses may be able to buy raw materials or components cheaper if purchased in bulk

Question 7

What is the technical economy of scale?

Answer 7

The use of machine, robot or computers can increase the speed and accuracy of production (through the use of technology)

Question 8

What is the marketing economy of scale?

Answer 8

A firm that sells on a large scale mat be able to afford more effective advertising

Question 9

What is diseconomies of scale?

Answer 9

When a firm gets so big that it becomes inefficient (rise in unit cost)

Question 10

What are the types of diseconomies of scale?

Answer 10

• Alienation- unmotivated workers due to company is too big/ feels unvalued
• Bureaucracy- rules and regulations
• Communication- things take longer/ messages may get confused/ difficult to maintain relationship with supplier