Economies of Scale Flashcards
what is meant by economies of scale?
- the reduction in average costs of production that occur as a business increases its scale of production
what is meant by internal economies of scale?
- reductions in average cost per unit of output as a result of increasing internal efficiencies of the business
what are the 5 types of internal economies of scale? (MMFTP)
- marketing
- managerial
- financial
- technical
- purchasing
what is marketing economies of scale?
- advertising costs are spread over more units
- each pound spent on advertising will have a greater benefit for the business as it grows
what is managerial economies of scale?
- able to employ specialist staff
- likley to work more efficiently and thereby reduce average costs of producing
what is financial economies of scale? (I)
- easier to access loans as are able to offer security
- negotiate more favourable rates of interest
what is technical economies of scale?
- machinery allows products to be made and jobs to be performed quicker
- more use of division of labour/specialisation
what is purchasing economies of scale?
- as businesses grow, they increase the size of orders for raw materials and components
- this may result in discounts being given so the cost of each individual component will fall
what is meant by external economies of scale?
- the advantages of scale that benefit a whole industry and not just an individual business
what are the 6 types of external economies of scale? (SEF)
- supplier
- educational
- financial
what is supplier economies of scale?
- a network of suppliers may be attracted to an area where a particular industry is growing
- the setting up locally of suppliers that are often in competition with each other reduces buying costs and allows use of JIT
what is educational economies of scale?
- local colleges will set up training schemes suited to the largest employers needs
- gives a large pool of skilled labour
- reduces recruitment and training costs
what is financial economies of scale? (E)
- financial services can improve
- banks and other financial institutions can provide services particularly geared towards a particular industry
what is meant by diseconomies of scale?
- the factors that cause higher costs per unit of output when the scale of an organisation continues to increase
what is meant by internal diseconomies of scale?
- when the average unit cost increases as output expands when the business becomes very large
what are the 3 causes of internal diseconomies of scale? (CCM)
- coordination issues
- communication issues
- motivation issues
explain coordination issues diseconomies of scale
- the larger the business, the harder it is to coordinate
- delegation and empowerment
- time managers spend in meetings can be viewed as an overhead cost
explain communication issues diseconomies of scale
- levels of hierarchy increase as a business increases
- high inefficiency
- miscommunication
- messages become distorted
explain motivation issues diseconomies of scale
- may feel as though their views are being ignored as theyre distanced from decision makers
- may not give of their best
what are the 2 causes of external diseconomies of scale?
- overcrowding in industrial areas
- increased price of resources
what is overcrowding in industrial areas diseconomies of scale?
- traffic congestion may occur
- late deliveries and staff arrivals
what is increased price of resources diseconomies of scale?
- more business in an area means increased demand for labour
- land, services and materials may become more expensive as the industry grows
what are 3 reasons that small firms continue to survive?
- target market size
- quality of product/service
- customer loyalty
how are shareholders impacted by economies of scale?
- increase in size = increase in share values
