Economies and Diseconomies of Scale Flashcards
What are economies of scale?
Savings a business makes from being larger. As output rises, cost per unit falls.
What are technical economies of scale?
Investing in production so that unit cost is lower as techniques are more efficient and can take a larger capacity.
What is an example of technical economies of scale?
For example, a double decker bus instead of a single decker - same cost to drive it but more passengers.
What are purchasing economies of scale?
When a business receives a discount because they have bought in bulk meaning cost per unit falls
What are marketing economies of scale?
Spreading the fixed cost of promotion over a larger level of output.
What are managerial economies of scale?
Spreading the fixed cost of management staff and IT systems over a larger level of output. By specialising in certain tasks or processes, the workforce is able to produce more output in the same time.
What are financial economies of scale?
Larger firms are rated by the banks to be more ‘credit worthy’ and have access to credit facilities, with favourable rates of borrowing. Smaller firms face higher rates of interest on overdrafts and loans.
What are risk bearing economies of scale?
The ability to spread risk over a larger product range. Can spread the costs of uncertainty over a wider range of activities and therefore reduce their unit cost.
What are external economies of scale?
External economies of scale occur outside of a firm but within an industry. e.g Investment in industry-related infrastructure including telecommunications can cut costs for all
What are support services?
Services outside the business that the business can benefit from, for example the support services for an airline would be the shops within the airport or having RnD facilites nearby that all businesses can benefit from
How is the pool of labour an external economy of scale?
Being located near a college or university means there is a wider pool of labour to choose from
What are diseconomies of scale?
The costs of being too big. The drawbacks of expanding.
How can communication be a DEOS?
As the business expands communicating between different departments and along the chain of command becomes more difficult. Less face to face.
How can motivation be a DEOS?
Less likely to feel motivated in a large organisation. Likely to feel isolated and unappreciated. Harder for a good team environment and personal relationships.
How can direction/control/coordination be a DEOS?
More difficult for managers to supervise their subordinates and check that everyone is working together effectively, as the spans of control have widened.
