Unit 1.6 Flashcards
Define economies of scale
When a firm’s average cost decrease as it increase its scale of production
Define diseconomies of scale
When a firm’s average cost increases as it increases its scale of production
What are the benefits of a small organization?
- Can quickly adapt to changing consumer needs
- Personal service customs
- Can be more easily managed by the owner
- Easier communication with all stakeholders
- Quick decision-making
What are the benefits of large organizations?
- Able to raise more capital quickly
- Can afford research and development into new products
- Can employ specialized workers in each department
- Cheaper costs from large-scale production
- Products can be spread across many different markets
Define internal growth
Expansion of a business using own capabilities and resources
Define external growth
Expansion through merging or acquiring other businesses
What is horizontal integration?
Integration with firm in same industry and at the same stage of production
What is verticle backward integration?
Verticle: Integration with firm in the same industry and at different stage of production
Verticle backward: Integration with a supplier
What is verticle forwards integration?
Integration with a customer
What is conglomerate integration?
Integration with firm in a different industry
Define a Multinational company (MNC)
A company that operates in 2 or more countries, however, have their headquarters in the established country
Define Globalization
The growing integration and interdependence of the world’s economies
Impact of multinational companies on host countries
Pros
- Investment in local economy
- Job creation
- MNC buys local resources
- Tax revenue for government
- Training local staff
cons
- Poor publicity (e.g. labour conditions, sweatshops, pollution)
- Closure of local business who can’t compete
- Reduction in local culture
- Depletion of natural resources
What are the sources of economies of scale
Purchasing economies
bulk -buying discounts - discounts for larger orders
E.g. buying 1kg versus 100 g of apple
Financial economies
Lower cost of borrowing due to higher trust from banks
E.g. lower interest rates
Managerial economies
Can hire specialists in each area (marketing, finance etc) rather than having General manager doing everything
Marketing economies
Same marketing campaign over the world so can spread costs over a larger production
Technical economies
Large firms are more likely to be able to afford to use mass production
What are Diseconomies of scale
Communication problems and bureaucracy
- Slow communication and decision making
- Paperwork, filing, meetings etc
Poor coordination and control
- Harder to manage departments which can be in many places/ countries
Staff morale
- Poorer working conditions
- Overspecialization of labour
