internal and external economies of scale Flashcards
what is internal economies of scale?
lower unit costs as a result of increasing internal efficiencies of the business
what are the six types of internal economies of scale?
- marketing
- managerial
- risk bearing
- financial
- technical
- purchasing
marketing economies of scale
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)
managerial economies of scale
better organisation
risk bearing economies of scale
spreading and minimising risks
financial economies of scale
lower interest rates with larger borrowing
technical economies of scale
using advanced technology
purchasing economies of scale
bulk buying
what is external economies of scale?
lower unit costs for the whole industry and not just an individual business e.g. a more skilled workforce
what are 5 types of external economies of scale?
- labour
- supplier economies
- educational economies
- financial economies
- commercial services
what is labour economies of scale?
having a skilled workforce
what is supplies economies of scale?
discounts from reliable suppliers
what is educational economies of scale?
skilled workforce from nearby schools
what is financial economies of scale?
cheaper loans from local banks
what is commercial services economies of scale?
reduced costs from nearby services e.g. transportation, utilities, advertising agencies…
what is economies of scale?
when increased production leads to lower unit costs
what is diseconomies of scale?
the factors that cause higher costs per unit as the organisation grows - the causes of inefficiency in large organisations
what are 6 things that can cause diseconomies of scale?
- regulatory costs
- office politics / industrial relations
- the principal agent problem
- risk aversion
- waste / inefficiency in large organisations
- rising costs of complexity
what are regulatory costs?
having to follow regulations
what are office politics / industrial relations?
conflict in the workplace
what is the principal agent problem?
conflicts between managers and shareholders
what is risk aversion?
costs from avoiding risks too much
what is waste / inefficiency?
money lost due to disorganisation in big companies
what are rising complexity costs?
paying more as things get harder to manage
