Economies And Diseconomies Of Scale

Question 1

What are economies of scale

Answer 1

The cost advantages that a business exploits by expanding the scale of production

Question 2

What is the effect of economies of scale

Answer 2

To reduce the long run average costs of production (this improves productive efficiency)

Question 3

Technical economies of scale

Answer 3

• large businesses can invest in expensive and specialist capital machinery
• specialisation of the workforce
• the law of increased dimensions

Question 4

Marketing economies of scale and monopsony power

Answer 4

A large firm can spread its advertising and marketing budget over a large output and it can purchase at bulk (at discounted prices if it has monopsony power)

Question 5

Managerial economies of scale

Answer 5

Using specialised staff

Question 6

Financial economies of scale

Answer 6

Larger firms are more ‘credit worthy’ - e.g. lower interest rates on loans

Question 7

Network economies of scale

Answer 7

Can build networks of suppliers / customers

Question 8

External economies of scale

Answer 8

It involves the changes outside of the business e.g. result from the expansion of the entire industry of which the business is a member (lower unit costs for many/all firms inside the market)

Question 9

Agglomeration economies

Answer 9

Businesses in similar industries cluster together and attract an influence of skilled talent that then provides human capital to expanding businesses

Question 10

Examples of external economies of scale

Answer 10

• university research
• transport networks
• relocation of suppliers
• influx of human capital - skilled workers

Question 11

What may diseconomies of scale be caused by

Answer 11

• control (imperfect and costly to monitor all production)
• co-operation (workers in large firms may feel alienated)
• loss of control over costs (big businesses lose control over fixed costs such as marketing costs)

Question 12

What does diseconomies of scale mean

Answer 12

• a business has moved beyond their optimum size
• businesses are suffering from productive inefficiency
• higher unit costs will reduce total profits
• may also charge higher prices in order to cover their increased costs
• lost competitiveness could lead to declining market share and also a fall in their share price

Question 13

Examples of diseconomies of scale

Answer 13

• regulatory costs

- risk aversion

Question 14

Main advantages of economies of scale

Answer 14

• lower unit costs in the long run
• economies of scale lead to a rise in business profits (fund investment / innovation)
• more competitive in global markets

Question 15

Downsides to economies of scale

Answer 15

• standardisation of products
• lack of market demand
• developing monopoly power