Theme 3: Economies of scale Flashcards
What are the 6 economies of scale?
- Risk bearing
- Managerial
- Financial
- Purchasing
- Technical
- Marketing
What are purchasing economies of scale?
Bulk buying reduces a firms costs as they can place larger orders and negotiate lower prices.
What are technical economies of scale?
When big firms invest in specialist capital to increase productivity and decrease LRAC.
What are managerial economies of scale?
Hiring specialist managers who are more productive.
What are marketing economies of scale?
When big firms spread the cost of marketing across many units. Reducing LRAC.
What are financial economies of scale?
Increase risk = higher interest rates
So high sales and high profits = low interest rates
As firms expand and grow bigger they become less risky and so they can borrow at lower interest rates. So lower repayment costs.
What are risk bearing economies of scale?
Big firms = diversity
Which lowers the cost of failure.
If one company goes wrong others support.
What are internal economies of scale
Reduction in LRAC as a firm increases their production.
Why are economies of scale only found in the Long run?
As only found when firms in the long run have enough time to scale up and expand.
What are external economies of scale? and why do they lower costs?
As industry output increases there is a decrease in LRAC.
Due to lower recruitment costs and knowledge transfer.
e.g. in silicon valley before the industry was big they had to pay skilled people lots of money to move there but now everyone skilled in that sector already lives there.
Draw an economies of scale and diseconomies of scale diagram
What is the minimum efficient scale?
Where a firm first reaches its lowest LRAC
What are the 3 internal diseconomies of scale?
- Alienation
- Bureaucracy
- Communication
What is alienation diseconomies of scale
Decrease motivation which leads to decrease productivity.
What is bureaucracy diseconomies of scale
The cost of the additional increase in paperwork, managers and secretaries.
