Economies of scale

Question 1

What is economies of scale ?

Answer 1

A reduction in the LRAC as output increases

The cost advantages companies gain from increasing their output

Question 2

Name all the internal economies of scale ?

Answer 2

Risk bearing
Financial
Managerial
Technical
Marketing

Question 3

Name 3 external economies of scale ?

Answer 3

Better transport infrastructure - shorter travel times = lower costs

Components from suppliers move closer - as you grow it is in their interest to move closer

R+D firms move closer

Question 4

What is risk bearing economies ?

Answer 4

Can spread more risk over a larger output range

Question 5

What is financial economies of scale ?

Answer 5

Firms can negotiate lower interest rates as they are reputable / big

Question 6

What is managerial economies of scale ?

Answer 6

As a firm gets larger , they can hire specialist managers to boost productivity

Question 7

What are technical economies of scale ?

Answer 7

As firms get bigger , they can buy specialist machinery to boost productivity

Question 8

What are marketing economies of scale ?

Answer 8

As they get bigger they can get more ads / brand exposure chances

Question 9

What are purchasing economies of scale ?

Answer 9

As they get bigger they can buy raw materials in bulk , unit discounts as firms grow

Question 10

What are diseconomies of scale ?

Answer 10

When an increase in LRAC as output increases , business gets too big for its boots

Question 11

What are the 3 diseconomies of scale ?

Answer 11

Control - too many workers , lower productivity due to low supervision

Communication - takes longer to spread messages

Coordination - harder to mobilise workforce and make change

Motivation - workers feel less valued as they become de associated with powerful people