Economies Of Scale Flashcards
Definition of economies of scale
As output rises, average costs fall - falling average costs due to expansion
Define diseconomies of scale
Output continues to increase and average costs rise - rising average costs when a firm becomes too big
When a businesses’ average cost per unit starts to increase due to inefficiency.
What are the internal economics of scale?
Risk-bearing (economies) Financial Managerial Technical Marketing Purchasing Really fun mums try making paratas
Define external economies of scale
Cost benefits that all firms in an industry can benefit from when the industry expands - average costs decrease
What are the external economies of scale?
ISAS Infrastructure Skilled labour Access to suppliers Similar businesses in the area
Define bureaucracy
System of administration that uses a large number of departments and officials
Define coordinate
To organize people or things so that they work together well
What are the 4 diseconomies of scale
Average costs rise as production becomes inefficient:
Bureaucracy
Communication problems
Lack of control
Distance between senior staff and shop floor workers
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Explain purchasing economies
Large firms that buy lots of resources get cheaper rates.
Suppliers offer discounts to firms that buy raw materials and components in bulk this is known as bulk buying - buying goods in large quantities which is cheaper per unit than in small quantities
Explain marketing economies
Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm.
Explain technical economies
- Larger firms can afford to invest in specialisation and more advanced and productive machinery and capital
- As a result, larger factories are more efficient than small ones which will lower their average costs.
One example of a technical economy is the way a large firm will make better use of an essential resource than a smaller firm as they will use it more often to produce - need it more which will reduce average costs.
Explain financial economies
- Large firms can put pressure on banks when negotiating the price of loans.
- Banks are often happier lending large amounts to large companies at lower interest rates as they are deemed less risky.
- Therefore larger firms can take advantage of cheaper credit lowering their average costs.
Large firms can get access to money more cheaply. They also have a wider variety of sources to choose
from. For example, a large limited company can
raise money by selling shares. This option is not available to a sole trader.
Define/formula of average cost
Total costs / quantity produced
Explain managerial economies
- As firms expand, they can afford specialist managers who can monitor and therefore boost the productivity of workers.
- They are also more able to specialise and divide their labour.
- As a result, efficiency and productivity are likely to improve and average costs fall.
A small business may employ a general manager responsible for finance, human resources, marketing and production yet may find this role demanding and
may be weak in some areas of the job
Explain risk-bearing economies
- Larger firms are more likely to have wider product ranges and sell into a wider variety of markets which reduces the risk and spread the cost of uncertainty/risk across larger output
- means costs are spread across several aspects of production meaning average costs are lower and they have other areas to fall back on
Explain the external economies of skilled labour
- If an industry is concentrated in one area, there may be a build-up of labour with the skills and work experience required by that industry.
- Therefore it is also likely that local schools and colleges will provide vocational courses that are required by local industry.
- As a result, training costs will be lower when workers are recruited and average costs are reduced.
Explain the external economies of infrastructure
- If a particular industry dominates a region, the roads, railways, ports, buildings and other facilities will be shaped to suit that industry’s needs which reduces average costs of the alternative.
- Investment in better transport network will result in a decrease of costs for all companies in the area.
- Investment in industry-related infrastructure including telecommunications or better internet lines also cut costs for all businesses
Explain the external economies of access to suppliers
- An established industry in a region will encourage suppliers in that industry to set up close by.
- Specialist marketing, cleaning, banking, waste disposal, distribution, maintenance and components suppliers are likely to be attracted to the area.
- All firms in the industry will benefit from their services and reduce average costs.
Explain the external economies of similar businesses in the area
- When firms in the same industry are located close to each other, they are likely to cooperate with each other so that they can all gain.
- For example, they might work together to share the cost and benefits of a research and development centre and the development of such facilities in the area (at a local uni) will benefit all of the and reduce average costs.
E.g. as high-tech businesses do in Silicon Valley, California, USA.
Explain the diseconomies of bureaucracy
- Larger business rely more on bureaucracy.
- If a business becomes too bureaucratic, it means that too many resources are used in administration e.g. too much time may be spent filling in forms or writing reports.
- Also, decision making may be too slow and communication channels too long.
If resources are wasted in administration the firm is more inefficient and average costs will start to rise.
Explain the diseconomies of communication problems
- Some very large organisations employ hundreds of thousands of workers, they are likely to be spread all over the world.
Workers in different countries speak different languages and have different cultures. There are also time differences between different global operations. - This can make communication in an organisation challenging and wastes therefore it negatively impact productivity and increases average costs
Explain diseconomies of scale lack of control/coordination
- A very large business may be difficult to control and coordinate. (Thousands of employees, billions of pounds and dozens of plants all over the world can make running a large organisation demanding.) = lots of departments and lots of people to monitor
- There may be a need for more supervision and more layers of management, which will raise costs and this lack of control and coordination will negatively impact productivity of staff and the company, therefore will raise average costs
Explain the diseconomies of distance between senior staff and shop floor workers
- If a firm becomes too big, relations between workers and managers may worsen as there are too many layers of management between the senior staff at the top and the shop floor workers in a factory.
- As a result, senior managers might be so far removed from those at the bottom of the organisation that they may not be aware of their needs.
- This lack of understanding or the feeling that as there are so many employees they are replaceable may result in many workers becoming demotivated.
- As a result, conflicts may occur and resources may be wasted resolving them as well as productivity of demotivated workers will decrease which raises average costs
