Production, Costs, and Revenue Flashcards
What are economies of scale?
Economies of scale are the cost advantages that a business exploits by expanding the scale of production. The effect is to reduce the long run average costs of production, which improve efficiency and can benefit consumers with lower prices.
Describe internal and external economies of scale
Internal economies of scale arise from the growth of the business itself: technical, financial, purchasing, marketing, monopsony power, risk-bearing, managerial, networking.
External economies of scale involve changes outside of the business’ control: specialist firms and infrastructure/transport links, training and education, research and development, relocation of suppliers, agglomeration.
What are diseconomies of scale?
Diseconomies of scale mean that a business has moved beyond their optimum size, so are suffering from productive inefficiency. Higher unit costs will reduce total profits, and can lead to higher prices to cover costs. Lost competitiveness could lead to declining market share.
Describe internal and external diseconomies of scale
Internal diseconomies of scale: coordination difficulties, communication problems, technical diseconomies, excessive bureaucracy, industrial relation problems, less flexibility. External diseconomies of scale: pollution and traffic, competition, higher costs of factors of production.
PESTEL (C) factors: Political, Economic, Social, Technological, Environmental, Legal, Competition
What are advantages and disadvantages of economies of scale?
Advantages: unit costs are lower in the long run, bringing down prices for consumers and making products affordable. They lead to a rise in business profits, helping investment and innovation. Businesses benefiting will be more competitive, leading to improved export performance.
Disadvantages: standardisation of products, lack of market demand, developing monopoly power.
