Economies & Diseconomies of Scale Flashcards
Purchasing economies of scale
When you bulk buy and the cost per unit goes down.
Financial economies of scale
Can for example borrow larger amounts of money at lower interest.
Marketing economies of scale
While total marketing costs increase as a business grows, they do not rise proportionally to sales. If a business doubles its sales, it will perhaps not have to double its marketing costs. This means that the average cost of marketing falls as sales increase.
Technical economies of scale
Large businesses own sophisticated machinery to mass produce their output using flow production. They are able to justify huge investment in flow production lines because thanks to working at a high-capacity level, they can significantly lower unit costs. Because this method of production uses expensive technical equipment, only very large businesses can afford the level of capital investment required.
Managerial economies of scale
Large firms can attract the best managers who can create a better work environment and encourage higher efficiency from workers. As people cannot be equally good at everything, specialization leads to higher productivity which then leads to lower average costs.
Specialisation economies of scale
This leads to division of labour, and the benefits that come from it.
Division of labour happens when the production process is split up into different tasks and each worker performs one of these tasks. When workers are trained in just one task and specialise in it, efficiency and output can be increased because they are able to complete their assigned task faster. Also, less time is wasted moving from one workbench to another.
Risk-bearing economies of scale
Most efficient for large conglomerates. Now very few risks can pose an actual threat, as the damage/risk can be offset through more favourable conditions elsewhere, quickly making up for it.
