internal and external economies of scale

Question 1

what is internal economies of scale?

Answer 1

lower unit costs as a result of increasing internal efficiencies of the business

Question 2

what are the six types of internal economies of scale?

Answer 2

• marketing
• managerial
• risk bearing
• financial
• technical
• purchasing

Question 3

marketing economies of scale

Answer 3

lower costs on advertising due to scale (when a business spends the same amount of money to target more people so each person reached costs less)

Question 4

managerial economies of scale

Answer 4

better organisation

Question 5

risk bearing economies of scale

Answer 5

spreading and minimising risks

Question 6

financial economies of scale

Answer 6

lower interest rates with larger borrowing

Question 7

technical economies of scale

Answer 7

using advanced technology

Question 8

purchasing economies of scale

Answer 8

bulk buying

Question 9

what is external economies of scale?

Answer 9

lower unit costs for the whole industry and not just an individual business e.g. a more skilled workforce

Question 10

what are 5 types of external economies of scale?

Answer 10

• labour
• supplier economies
• educational economies
• financial economies
• commercial services

Question 11

what is labour economies of scale?

Answer 11

having a skilled workforce

Question 12

what is supplies economies of scale?

Answer 12

discounts from reliable suppliers

Question 13

what is educational economies of scale?

Answer 13

skilled workforce from nearby schools

Question 14

what is financial economies of scale?

Answer 14

cheaper loans from local banks

Question 15

what is commercial services economies of scale?

Answer 15

reduced costs from nearby services e.g. transportation, utilities, advertising agencies…

Question 16

what is economies of scale?

Answer 16

when increased production leads to lower unit costs

Question 17

what is diseconomies of scale?

Answer 17

the factors that cause higher costs per unit as the organisation grows - the causes of inefficiency in large organisations

Question 18

what are 6 things that can cause diseconomies of scale?

Answer 18

• regulatory costs
• office politics / industrial relations
• the principal agent problem
• risk aversion
• waste / inefficiency in large organisations
• rising costs of complexity

Question 19

what are regulatory costs?

Answer 19

having to follow regulations

Question 20

what are office politics / industrial relations?

Answer 20

conflict in the workplace

Question 21

what is the principal agent problem?

Answer 21

conflicts between managers and shareholders

Question 22

what is risk aversion?

Answer 22

costs from avoiding risks too much

Question 23

what is waste / inefficiency?

Answer 23

money lost due to disorganisation in big companies

Question 24

what are rising complexity costs?

Answer 24

paying more as things get harder to manage