Economies And Diseconomies Of Scale Flashcards
Definition of economies of scale
As output increases, long-run average costs fall
Definition of internal economies of scale
Reductions in the long run average total costs arising from growth of the firm
Definition of External economies of scale
Reductions in the long run average total costs arising from growth of industry in which the firm operates
What are the six internal economies of scale?
- marketing
- managerial
- financial
- technical
- risk-bearing
- purchasing
Definition of purchasing economies of scale
Occurs when a business buys goods in bulk and benefits from discount
Definition of managerial economies of scale
Occurs when a large firm can employ specialist workers to complete tasks and can spread the cost
Definition of financial economies of scale
Occurs when a large business can borrow money at a lower rate of interest than a smaller business
Definition of technical economies of scale
Occurs when a business invest in new technology and is able to increase production. As a result, production cost per unit will fall
Definition of risk-bearing economies of scale
Occurs when a business produces a range of products, which means it is not dependent on just one product
Definition of marketing economies of scale
Occurs when a business grows and the average cost of advertising per unit falls
Definition of diseconomies of scale
As output increases, long run average cost rises
Definition of internal diseconomies of scale
Increase in long run average cost as a result of changes in the size of the firm
Definition of external diseconomies of scale
Increase in long run average cost as a result of the growth of the market
Definition of managerial diseconomies of scale
Where a company grows but it’s management is unfit for purpose e.g. lack of experience
Definition of communication failure
Large firms can lose direction. Too many layers of management between bosses and workers. They may be too geographically remote to feel part of the corporate vision
