Economies of scale

Question 1

Why do business want to grow

Answer 1

• To lower costs- the more a business makes the cheaper it becomes to make
• Securing supplies and outlets
• To increase market shares
• Wider range of products
• Survival

Question 2

what is Internal economies of scale

Answer 2

The benefits the company gets from increasing in size.

Question 3

What are the 5 internal economies of scale?

Answer 3

• Purchasing and marketing economise - Discounts when buying in bulk. Administration costs don’t rise and its more cost effective.
• Technical economies- more efficient which mean output rises so cost falls. machinery is quicker than people
• Managerial economies- bigger business need specialist managers for departments. better managers have more skills so they can lower cost.
• Financial economies- banks will give bigger business moremony with less interest.
• Risk bearing economies- diversifying- spreading the risk

Question 4

What are the external economies of scale?

Answer 4

• Labour economies- training costs could be reduced if local population already has the skill cos the numbers of competitors.
• Ancillary and commercial services- tendency to attract smaller business around them like suppliers. ( like at asda and ford)
• Co-operation- big frim in the same industry working together like Ford and Mazda.
• Disintegration- production is broken in to smaller parts so more specialists can take over.

Question 5

Diseconomies of scale

Answer 5

• After a certain point the business expands so much that cost start to rise.
• Internal Diseconomies- too many staff, difficult co-ordination, need more middle management, bad reltion ship with staff and mangers, high staff turn over, increase in recruitment costs.
• External Diseconomies- overcrowding in the industry, price of land increases, price of labor increases, price of materials increase, could lead to delivery delays

Question 6

Economies of scale advantages

Answer 6

• The larger a business becomes the more it benefits from economies of scale, reducing costs
• The lower the unit costs, the greater the profit and ability to undercut competitors.
• Shareholders benefit from greater profit meaning higher share prices

Question 7

Economies of scale disadvantages

Answer 7

• If the business get to big diseconomies of scale
• business can dominate the market so much they start having monopolistic tendencies and come under investigation by police.
• business can often lose sight of customers and their wants and needs realising in a lose of sails and profits.