Economies of scale Flashcards
How can a firm increase in size?
In two ways, by internal and by external growth.
What is internal growth?
An increase in the size of a firm resulting from it enlarging exsiting plants or opening new ones
Ex. McDonalds opening new stores
What is external growth?
An increase in the size of a firm resulting from it merging with or taking over another firm.
What is a horizontal merger?
When to firm merge that produce the same product at the same stage of production.
Ex. Car producers
What are the advantages of a horizontal merger?
- firms can take greater advantage of economies of scale, they can produce at lower average costs
- increase their market share, because one direct competitor is eliminated
- Rationalisation: eliminating uneccessary equipment and plant to make a firm more efficient
What are the risks of a horizontal merger?
Large firms can be difficult to control.
What is a vertical merger?
When two firms merge producing the same product at different stages of production.
What is a vertical merger backwards?
A merger with a firm at an earlier stage of the supply chain. Make sure to have high quality resources at reasonabele priced.
Ex. Tyre manufacturer merge with a producer of rubber.
What is a vertical merger forwards?
A merger with a firm at a later stage of production.
To ensure development and marketing of the product.
Ex.
Oil company may buy a chain of petrol stations
What is a conglomerate merger?
When to firms merge producing different / unrelated products.
Ex. insurance company with chocolate producer
Why do firms merge conglomerately?
To reduce business risks. If demand for one product declines in a recession, maybe the demand for the other product increases.
Why is a conglomerate merger challenging?
It can be difficult to control and coordinate the firm.
What does a merger has for effects on consumers?
If a merger results in greater economies of scale, the products get cheaper and there is probably a higher quality.
If a merger results in diseconomies of scale, the products get more expensive, there is a reduced choice and the quality gets poorer.
What are economies of scale?
Are the lower long run average cost advantages that companies experiencing when production becomes efficient.
What are internal economies of scale?
Lower long run average costs resulting from a firm growing in size.
What are external economies of scale?
Lower long run average costs resulting from an industry growing in size.
What are the different types of internal economies of scale?
- Buying economies (buy raw material in bulk. Ex. Wallmart)
- Selling economies (transporation costs, packing goods and processing orders. Ex. Amazon)
- Financial economies (shares and loans)
- Research and Development (R&D) (developing more efficient methods and new technolgy. ex. APPLE)
What are internal diseconomies of scale?
When firms long run average costs rise, because it grew too large.
What are the internal diseconomies of scale?
- Difficulties controlling the firm (Management is complex)
- Communication problems (difficult that everyone has all the knowledge)
- Poor indsutrial relations (less productivity –> dminishing margibal returns)
What are external economies of scale?
When an idustry gorws, and the larger industry now enables the firms in that industry to reduce their long run average costs.
What are there for exernal economies of scale?
- A skilled labour force (already trained by other firms in that industr. Ex. Silicon valley)
- Specialist services (universities offer special courses and transporation firms may privide services sepcially designed)
- Subsidies from the government (Ex. oil in the US, lower costs)
- Specialist supllieres of raw material (other industries set up production providing for the needs of the large industry)
- Better Reputation (Ex. Maledives for holiday)
What are external diseconomies of scale?
The cost disadvantages because of an industry growng too large.
What are there for external diseconomies of scale?
- cause traffic jams
(unit costs goes up, because of longer journey times, higher transportation costan possibly reduced productivity of the workers)
