Economies + Diseconomies Of Scale Flashcards
Economies of scale
Benefits that arise as a result of lower unit cost per output
Diseconomies of scale
When the cost per unit increases as the firm grows
Reasons for growth
- 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
Internal (organic) growth
Natural growth of a firm achieved by inc production and sales
External growth
Growth through merging or taking over another business
Internal economies of scale
Achieved as a result of growing internally
Purchasing economies of scale
- internal eos
- gained from purchasing raw materials + supplies in a larger quantity
- the larger the firm the more likely the discount
Financial economies
- internal
- larger firms can negotiate cheaper loans + more likely to get loans because lower level of risk
- more assets as security - banks like
Managerial economies
- internal eos
- larger firms able to employ specialist managers
- allows more effective operation
- can carry out their role in efficient way
Technical economies
- internal
- as a firm gets larger - gain benefit of buying more effective capital equipment
- smaller firms unable to invest in same way
Marketing economies
- larger firms benefit from more efficient marketing methods
- above the line methods like to are available
Risk-bearing economies
- larger firms can spread risk by diversifying into diff products
- smaller firms cant as generally focus of fewer products
External economies
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
Concentration economies
- 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
Information economies
- 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
Diseconomies of scale
An increase in unit costs as a result of an increased scale of production
Reasons for diseconomies of scale
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
Costs of diseconomies of scale
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
