Economies of Scale Flashcards
What is the difference between internal and external economies of scale
Internal economies of scale only benefit that specific company. External economies of scale benefit the whole industry
what are the 6 internal economies of scale and explain
Purchasing EOS: Bulk buying of materials in order to lower price and in turn lower average cost.
Technical EOS: Replacing Labour with capital (machinery) again reduce average cost.
Financial EOS: Large firms have a lower rate of interest as it is seen as being a better risk. This makes borrowing cheaper reducing average cost.
Marketing EOS: large firms can spread sunk cost such as advertising of a greater number of units and cross advertising of products this lowers average cost.
Managerial EOS: Specialist managers may be brought in this raises productivity and reduces average cost.
Increased Dimensions: Using bigger and bigger transport to reduce average cost or having a bigger ware house as cost per unit will fall.
3 External economies of scale
Access to the pool of skilled labour: more skilled people close by it mean that less money is spent on training lowing average cost. E.G. London, Finance Lower component cost: Industry located in once place reduces transport cost. Breakthrough R&D: Benifits such as new matirials or production process which can lower average cost
what is an economy of scale
Economies of scale are factors that cause the average cost to fall as output rises
What is a Diseconomy of scale
Factors that cause average cost to rise as the firm gets bigger
3 Diseconomies of scale
Co-ordination and communication: as firms get bigger the chain of co-ordination gets larger more meetings take place increasing administrative costs, raising Average costs Motivation as in large organisations people may not feel part of a team. Transport cost may increase as company further way from suppliers.
what does the economies of scale diagram look like and what are the axis
