economies of scale

Question 1

define the term ‘economies of scale’

Answer 1

economies of scale are the cost advantages that an enterprise enjoys due to size and large-scale production, where average costs generally decrease in the long run as output increases.

Question 2

what are the two types of economies of scale?

Answer 2

internal

external

Question 3

what is the difference between the two types of economies of scale

Answer 3

internal economies of scale occur within a firm while external economies of scale occur within an industry

Question 4

list three types of internal economies of scale

Answer 4

purchasing
marketing
financial
managerial
technical
risk-bearing

Question 5

explain purchasing economies of scale

Answer 5

large businesses are able to get discounts and special prices when bulk-buying. this gives them an advantage over smaller businesses who cannot afford to bulk-buy

Question 6

explain marketing economies of scale

Answer 6

businesses are able to spread their marketing/advertising budget/cost over a wider range/larger number of products. this eventually reduces overall unit costs in the long run.

Question 7

explain financial economies of scale

Answer 7

banks and other financial institutions treat larger businesses more favourably and therefore, they are able to negotiate lower interest rates, which lowers their cost of borrowing and eventually their long-term average costs.

Question 8

explain managerial economies of scale

Answer 8

large businesses can afford to employ the services of experts and specialists, such as accountants and marketing managers, which results in better decisions being made. this lowers the average costs of the businesses.

Question 9

explain technical economies of scale

Answer 9

large businesses can afford to invest in expensive and specialist capital machinery. they can also employ production techniques that smaller producers/businesses cannot afford.

Question 10

explain risk-bearing economies of scale

Answer 10

large businesses can spread their risks over a large number of investors by selling a wider range of products than their smaller competitors, and also selling them in different locations

Question 11

list three examples of external economies of scale

Answer 11

availability of skilled labour
improved infrastructure (e.g. roads)
having specialist support and supplies nearby

Question 12

define the term ‘diseconomies of scale’

Answer 12

diseconomies of scale occur when a firm grows too large and their average costs begin to increase/rise

Question 13

list three types of diseconomies of scale

Answer 13

communication problems
coordination + control problems
low worker morale (as a result of a large workforce; less contact between senior managers and subordinates)