Economies of scale Flashcards
What are Economies of Scale?
Economies of Scale are the cost advantages that enterprises obtain due to size, with cost per unit/average cost of production generally decreases as output increase.
Economies of scale happens when?
in the long run
equation of economies of scale
average costs= total costs/quantity produced
Main types of economies of scale
internal and external
what is internal economies of scale
reductions in long-term average costs as the scale of production and output of the firm
increases
types of internal economies of scale
purchasing economies of scale Marketing economies of scale Financial economies of scale Managerial economies of scale Technical economies of scale Risk-bearing economies of scale
What is purchasing economies of scale
When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk. This reduces the unit cost of raw materials and a firm gets an advantage over other smaller firms.
what is marketing economies of scale
A large firm can spread its advertising and marketing budget over a large output. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals.
what happens to the average cost for advertising if the quantity produced is increased
average cost will be less
equation for price of advertising
cost of advertisement/quantity produced
what is financial economies of scale
Larger firms often have access to more and cheaper sources of finance. Banks and other lending institutions treat large firms more favourably and these firms are in a position to negotiate loans at lower interest rates.
why do banks give larger firms more loans than smaller firms?
banks give them more loans as they can be less risky and they pay back
what happens when there are lower interest rates
the cost per unit decreases
what happens when there are higher interest rates
cost per unit increases
explain managerial economies of scale
A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers which results in better decision being taken and reduction in overall unit costs.
what is managerial economies of scale
improving business to lower cost per unit and employing individuals to help and that will make the lower average cost for the larger firms
what is technical economies of scale
Large-scale businesses can afford to invest in expensive and specialist capital machinery. Large scale producers can employ techniques that are unable to be used by a small scale producer.
what will happen if they buy better tech?
they will produce more goods and faster which will help reduce the average cost
explain what it means for firms to be able to use the better tech to full capacity
large firms can afford it and use it to full capacity, while small firms can’t afford it whilst now allowing to use to full capacity upon servicing and everything costing them more. Average cost increases compared to larger firms
explain risk bearing economies of scale
This is the ability to spread financial risks over many investors and reduce market risks by selling a range of products in different locations
what is risk bearing economies of scale
this is when large firms have a range of products meaning they don’t have to close down if people don’t like their current products they are selling
what is external economies of scale
falls in long-run average costs for a firm when the industry in which the firm operates
grows in size
mention the examples of external economies of scale
Being close to other similar businesses who can work together with each other.
Having specialist supplies and support services nearby.
improved infrastructure
availability of skilled labour
explain availability of skilled labour
this means there will be no need to train workers as they have been trained from the previous company
explain improved infrastructure
this means the government will make the roads, electricity etc better if there are a lot of businesses located in the same area
what is diseconomies of scale
Diseconomies of scale occur when a firm grows too large and average costs start to rise.
what are the types of diseconomies of scale
communication problem
co-ordination and control problems
low morale
explain the communication problem
When firms grow there can be problems with communication
As the number of people in the firm increases it is hard to get the messages to the right people at the right time
In larger businesses it is often difficult for all staff to know what is happening
explain the co-ordination and control problems
As a business grows control of activities gets harder
As the firm gets bigger and new parts of the business are set up it is increasingly likely people will be working in different ways and this leads to problems with monitoring
explain low morale
As businesses grow it is harder to make everyone feel as though they belong
Less contact between senior managers and employees so employees can feel less involved. Smaller businesses often have a better team environment which is lost when they grow
for a company to be efficient what do they do?
they produce at the lowest level of average cost
what happens when average cost goes up?
diseconomies of scale
on a graph the lowest point of the curve is known as what
constant economies of scale
