Economies Of Scale

Question 1

Economies of scale

Answer 1

the reduction in average costs of production that occur as a business increases its scale of production’.

Question 2

Internal economies of scale

Answer 2

Internal economies of scale is when there are reductions in average cost per unit of output as a result of increasing internal efficiencies of the business. There are 5 types of internal economies of scale, these are:

purchasing
managerial
financial
marketing
technical.

Question 3

Purchasing

Answer 3

“As businesses grow, they increase the size of orders for raw materials or components. This may then result in discounts being given and a fall in the cost of each individual component purchased. This will therefore reduce the average cost of production.”

Question 4

Technical

Answer 4

As businesses grow, they are able to purchase the latest equipment and incorporate new methods of production. This increases efficiency and productivity, reducing average costs of output as a result.

Question 5

Financial

Answer 5

As businesses grow, they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money – reducing the risk to the lender. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow.

Question 6

Managerial

Answer 6

As businesses grow, they are able to employ specialist managers. These managers will know how to get the best value for each pound (£) spent in the business, whether it is in production, marketing or purchasing. This will increase efficiency and thereby reduce the average costs of producing goods and selling the goods or services on offer

Question 7

Marketing

Answer 7

“As businesses grow, each pound (£) spent on advertising will have greater benefit for the business.

Question 8

External economies of scale

Answer 8

Supplier economies
Educational economies
Financial economies

Question 9

Supplier economies

Answer 9

a network of suppliers may be attracted to an area where a particular industry is growing. The setting up locally of supplier businesses, often in competition with one another, reduces buying costs and allows the use of systems such as just-in-time.

Question 10

Educational economies

Answer 10

local colleges will set up training schemes suited to the largest employers’ needs, giving an available pool of skilled labour. This reduces recruitment and training costs for those businesses who make up the industry concerned.

Question 11

Financial economies external

Answer 11

financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a given industry. For example, for an industry where cash flow may be a particular problem, debt factoring services may be made available at competitive rates.