Scale of production Flashcards
The rule
As output increases, a firm’s average cost decreases.
Economies of scale
are the factors that lead to a reduction in average costs as a business increases in size.
Purchasing economies(Economies of scale)
For large output, a large amount of components have to be bought. This will give them some bulk-buying discounts that reduce costs
Marketing economies(Economies of scale)
Larger businesses will be able to afford its own vehicles to distribute goods and advertise on paper and TV. They can cut down on marketing labour costs. The advertising rates costs also do not rise as much as the size of the advertisement ordered by the business. Average costs will thus reduce.
Financial economies(Economies of scale)
Bank managers will be more willing to lend money to large businesses as they are more likely to be able to pay off the loan than small businesses. Thus they will be charged a low rate of interest on their borrowings, reducing average costs.
Managerial economies(Economies of scale)
Large businesses may be able to afford to hire specialist managers who are very efficient and can reduce the business’ costs.
Technical economies(Economies of scale)
Large businesses can afford to buy large machinery such as a flow production line that can produce a large output and reduce average costs.
Diseconomies of scale
are the factors that lead to an increase the average costs of a business as it grows beyond a certain size
Poor communication(Diseconomies of scale)
as a business grows large, more departments and managers and employees will be added and communication can get difficult. Messages may be inaccurate and slow to receive, leading to lower efficiency and higher average costs in the business.
Low morale(Diseconomies of scale)
when there are lots of workers in the business and they have non-contact with their senior managers, the workers may feel unimportant and not valued by management. This would lead to inefficiency and higher average costs.
Slow decision-making(Diseconomies of scale)
As a business grows larger, its chain of command will get longer. Communication will get very slow and so any decision-making will also take time, since all employees and departments may need to be consulted with.
why are businesses divided
Businesses are now dividing themselves into small units that can control themselves and communicate more effectively, to avoid any diseconomies from arising.
