Production and expansion Flashcards
Entrepreneurship
bears risks
Labour
provides human effort in production
Capital
man-made resources and cost is involved in its production
Land
natural resources and cost is not involved in its production
Fixed factors
quantity of factor does not change when output changes
Variable factors
quantity of factor changes when output changes
Short run
employs both fixed and variable factors
Long run
employs variable factors only
Law of diminishing marginal returns
in the short run, as more and more units of variable factors are continuously being added to a given quantity of fixed factors, the marginal product will eventually diminish, ceteris paribus
Economies of scale
average cost of production decreases when output increases in the long run
Diseconomies of scale
average cost of production increases when output increases in the long run
Sources of internal economies of scale
● More discounts when bulk purchasing raw materials
● Lower cost of borrowing
● Lower average advertising cost spread across a larger quantity of output
● More extensive division of labour
Sources of external economies of scale
● Reduction of marketing and promotion costs
● Reduction of transportation costs
● Reduction of average cost of recruiting more skilled workers
Sources of internal diseconomies of scale
● Managerial efficiency is lowered because the firm become too large in scale
● The cost of further borrowing increases with more outstanding loans
● Marketing cost increases as the market may be saturated
Horizontal expansion
expanding production into the same stage of production
Horizontal expansion advantages
● Increase market share
● Reduce competition
Vertical backward
expanding production into the previous stage of production
Vertical backward advantages
obtain steady supply of raw materials
Vertical forward
expanding production into the latter stage of production
Vertical forward advantages
ensure sufficient market outlet
Lateral expansion
expanding production into related but not directly competing markets
Conglomerate
expanding production into totally unrelated markets/industries
Lateral/ conglomerate expansion advantages
● Reduce risk with business diversification
● Extending brand name to other markets
Other advantages of expansion
● Enjoy economies of scale
● Extending brand name to other markets (N/A to horizontal)
Firms’ objectives
● Maximizing profit
● Maximizing market share
● Fulfilling corporate social responsibility
