economies of scale and diseconomies of scale Flashcards
what are the 2 types of economies of scale
internal economies and external economies
what is internal economies of scale
these arise from the growth of the business itself
what is the external economies of scale
when they occur within an industry
types of internal economies of scale
Managerial
Technological
Risk-bearing
Financial
Marketing
what is the managerial EOS
when larger firms can have specialist managers which lowers average cost
what is technological EOS
when larger firms can afford to invest in more productive machinery, which will lower their average cost
What is risk-bearing EOS
When a firm because larger they can expand their production range or area of production
what is the financial EOS
banks are willing to lend loans more cheaply to larger firms, because they are deemed less risky also bigger firms may be able to sell shares
what is the purchasing EOS
larger firms can bulk-buy which means each limit will cost them less
what is the marketing EOS
If a business has lots of outlets, the costs of an advert is smaller per outlet than a business with any a few outlets
what can external economies of scale result to
these result from the expansion of the entire industry of which a business is a member
what can external economies of scale do
they lower unit cost for many/all firms inside the market (even small firms)
examples of external diseconomies of scale
A) Development of research and development facilities in local universities that several business in an area can benefit from
B) Spending by a local authority on improving the transport network for a local town or city
what is diseconomies of scale
these are increases in the average cost per extra unit produced
why do DOS occur
they occur because of decreasing returns to scale where output passes a certain point and the business has moved beyond its optimum size
these higher costs will reduce total profits
and business may then have to raise prices to cover increased costs
