Economies Of Scale Flashcards
Diseconomies of scale
Rising average costs when a firm becomes too big
Economies of scale
Falling average costs due to expansion
Internal economies of scale
Cost benefits that an individual firm can enjoy when it expands
Internal EOS examples
Purchasing, marketing, technical economies
Financial economies of scale
Large firms can get access to money cheaply, they also have a wider choice of sources to pick from.
Managerial economies of scale
As firms expand, they can afford specialist managers. Initially, managers may have to deal with everything
Risk-bearing economies of scale
Large firms are more likely to have wider product ranges and sell into variety of markets. This reduces the risk in business.
External benefits of scale + examples
Cost benefits that all firms in an industry can enjoy when the industry expands, examples are:
- skilled labor
- development of infrastructure
- access to supplies
- similar business in the area
How does bureaucracy lead to diseconomies of scale?
Larger business rely more on bureaucracy - too many resources are used in administration. Too much time spent on filling in forms. Decision making may be too slow.
How do communication problems lead to diseconomies of scale?
Some very large organisations have 000’s of workers in different countries, different cultures. Communication in organisations challenging.
How does lack of control lead to diseconomies of scale?
Very large businesses may be difficult to control and coordinate. More supervision and more management layers will need more $.
How does distance between senior staff and shop floor workers lead to diseconomies of scale?
If firms become too big, relationships may worsen. Senior staff may not be aware of worker needs. Conflict, demotivated, wasted resources.
