Economies of scale

Question 1

What are Economies of Scale?

Answer 1

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.

Question 2

Economies of scale happens when?

Answer 2

in the long run

Question 3

equation of economies of scale

Answer 3

average costs= total costs/quantity produced

Question 4

Main types of economies of scale

Answer 4

internal and external

Question 5

what is internal economies of scale

Answer 5

reductions in long-term average costs as the scale of production and output of the firm
increases

Question 6

types of internal economies of scale

Answer 6

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

Question 7

What is purchasing economies of scale

Answer 7

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.

Question 8

what is marketing economies of scale

Answer 8

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.

Question 9

what happens to the average cost for advertising if the quantity produced is increased

Answer 9

average cost will be less

Question 10

equation for price of advertising

Answer 10

cost of advertisement/quantity produced

Question 11

what is financial economies of scale

Answer 11

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.

Question 12

why do banks give larger firms more loans than smaller firms?

Answer 12

banks give them more loans as they can be less risky and they pay back

Question 13

what happens when there are lower interest rates

Answer 13

the cost per unit decreases

Question 14

what happens when there are higher interest rates

Answer 14

cost per unit increases

Question 15

explain managerial economies of scale

Answer 15

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.

Question 16

what is managerial economies of scale

Answer 16

improving business to lower cost per unit and employing individuals to help and that will make the lower average cost for the larger firms

Question 17

what is technical economies of scale

Answer 17

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.

Question 18

what will happen if they buy better tech?

Answer 18

they will produce more goods and faster which will help reduce the average cost

Question 19

explain what it means for firms to be able to use the better tech to full capacity

Answer 19

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

Question 20

explain risk bearing economies of scale

Answer 20

This is the ability to spread financial risks over many investors and reduce market risks by selling a range of products in different locations

Question 21

what is risk bearing economies of scale

Answer 21

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

Question 22

what is external economies of scale

Answer 22

falls in long-run average costs for a firm when the industry in which the firm operates
grows in size

Question 23

mention the examples of external economies of scale

Answer 23

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

Question 24

explain availability of skilled labour

Answer 24

this means there will be no need to train workers as they have been trained from the previous company

Question 25

explain improved infrastructure

Answer 25

this means the government will make the roads, electricity etc better if there are a lot of businesses located in the same area

Question 26

what is diseconomies of scale

Answer 26

Diseconomies of scale occur when a firm grows too large and average costs start to rise.

Question 27

what are the types of diseconomies of scale

Answer 27

communication problem
co-ordination and control problems
low morale

Question 28

explain the communication problem

Answer 28

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

Question 29

explain the co-ordination and control problems

Answer 29

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

Question 30

explain low morale

Answer 30

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

Question 31

for a company to be efficient what do they do?

Answer 31

they produce at the lowest level of average cost

Question 32

what happens when average cost goes up?

Answer 32

diseconomies of scale

Question 33

on a graph the lowest point of the curve is known as what

Answer 33

constant economies of scale