Economies of Scale

Question 1

Economies of Scale

Answer 1

The organisation benefits from discounts because of their size, resulting in an average cost per unit which falls as output increases

Question 2

Diseconomies of Scale

Answer 2

When a company becomes less efficient as a result of being too large, resulting in average cost per unit rising as output increases.

Question 3

Short Run/Long Run

Answer 3

Short run = a time period where there are some fixed costs

Long run = all costs are variable

Question 4

Internal and External Econs of Scale

Answer 4

Internal = factors from inside the organisation, i.e due to org increasing output

External = outside the organisation, ie generated by industry or whole economy’s growth

Question 5

Internal EoS Headings

Answer 5

Technical - can afford special machinery

Marketing - cost per unit of ads fall

Purchasing - discounts for bulk buying

Admin - one team can serve lots of sites

Organisational - more able to split tasks

Financial - easier and cheaper to get finance

R&D - internal R&D may reduce future costs

Selling - reduced distribution costs

Question 6

External EoS Headings

Answer 6

Skilled labour force - concentration of firms in the same industry in the same area

Suppliers - reduced transport costs as suppliers locate near firms

Infrastructure - development of infrastructure to support local industry

Tech improvements - more efficient tech developed to support the industry

R&D - provision of external/collab R&D

Local auth/gov spending - spending on infrastructure improvements

Question 7

Internal Diseconomies of Scale Headings

Answer 7

Poor communication - multiple sites, employee, split of firm from customers

Motivation - conflict between departments and reduced task ownership

Coordination - having too many divisions

Duplication - people doing the same jobs

Principle agent problem - extra costs as owners and managers want diff things

Admin costs - admin costs may outweigh production EoS

Technical - increased maintenance costs

Question 8

External Diseconomies of Scale

Answer 8

Natural resources - size of industry leads to shortages and increased prices

Wages - competition for skilled labour drives wages up

Congestion - increased costs in terms of delays or missed deadlines from congestion

Question 9

Outcomes of EoS

Answer 9

Positives:
Lower costs due to EoS
Lower prices due to lower costs
Competitive advantage due to lower costs
Increased profits from comp advantage

Negatives:
Barrier to entry for smaller firms
Reduced competition from barrier to entry
Reduced competition could lead to higher prices