Economies + Diseconomies Of Scale

Question 1

Economies of scale

Answer 1

Benefits that arise as a result of lower unit cost per output

Question 2

Diseconomies of scale

Answer 2

When the cost per unit increases as the firm grows

Question 3

Reasons for growth

Answer 3

• greater profits: inc sales —> higher profits
• inc market share: inc power of firm in market eg in determining prices to get higher profit margins or negotiating power w suppliers
• higher chances of survival: larger firms gen easier to survive + borrow money
• cost reductions: larger firms tend to be more efficient —> make better use of resources —> gain eos through utilising factors of production better

Question 4

Internal (organic) growth

Answer 4

Natural growth of a firm achieved by inc production and sales

Question 5

External growth

Answer 5

Growth through merging or taking over another business

Question 6

Internal economies of scale

Answer 6

Achieved as a result of growing internally

Question 7

Purchasing economies of scale

Answer 7

• internal eos
• gained from purchasing raw materials + supplies in a larger quantity
• the larger the firm the more likely the discount

Question 8

Financial economies

Answer 8

• internal
• larger firms can negotiate cheaper loans + more likely to get loans because lower level of risk
• more assets as security - banks like

Question 9

Managerial economies

Answer 9

• internal eos
• larger firms able to employ specialist managers
• allows more effective operation
• can carry out their role in efficient way

Question 10

Technical economies

Answer 10

• internal
• as a firm gets larger - gain benefit of buying more effective capital equipment
• smaller firms unable to invest in same way

Question 11

Marketing economies

Answer 11

• larger firms benefit from more efficient marketing methods
• above the line methods like to are available

Question 12

Risk-bearing economies

Answer 12

• larger firms can spread risk by diversifying into diff products
• smaller firms cant as generally focus of fewer products

Question 13

External economies

Answer 13

Achieved by a firm as a result of growth n the industry in which it operates
Many of those advantages can occur if they’re located close to other competing firms

Question 14

Concentration economies

Answer 14

• external eos
• firms benefit as industry grows in specific region bc skilled labour tends to move there
• local colleges provide training courses
• suppliers tend to be located nearby
• all reduce costs + JIT more achievable

Question 15

Information economies

Answer 15

• firms benefit as information services set up to benefit industry
• eg access to data or market research info - cheaper for individual firms to access
• internet provides info

Question 16

Diseconomies of scale

Answer 16

An increase in unit costs as a result of an increased scale of production

Question 17

Reasons for diseconomies of scale

Answer 17

1) communication problems —> as inc in size - becomes for diff to communicate in effective way. Inc no of staff makes decision making more complex. Organisational structure develops inc levels in hierarchy - communication slows down

2) problems in managing production process —> large-scale pro unit on difficult to manage. Storage costs inc and as reaches capacity - need for physical growth inv more fixed costs

3) reduction in morale —> loose sense of belonging in larger org —> less inclined to push sleeves + work hard —> inc labour turnover + absenteeism

Question 18

Costs of diseconomies of scale

Answer 18

1) reaching full capacity = machines working for longer —> reduced time for maintenance —> inc breakdowns
2) closer to full capacity = overtime to fulfil orders —> unit costs inc bc of labour
3) must be monitored carefully —> must review impact of the costs when taking decision to inc size of firm