1.5 Flashcards
Economies and diseconomies of scale (15 cards)
What is economies of scale?
when a business increase it’s output and lowers it’s average cost
What is internal economies of scale?
reduce costs and increase in output that is achieved inside the company
What are the different types of internal economies of scale?
financial, managerial, marketing, purchasing, technical
What is financial economies of scale?
large business receive lower interest rates on loans comapred to small businesses due to being perceived as less risky
cheaper loan lowers average cost
What is managerial economies of scale?
large businesses employ specialist managers who are more efficient in tasks
this efficiency lowers average cost
What is marketing economies of scale?
large business spread the cost of advertising over a large number of sales which reduces average cost
What is purchasing economies of scale?
large businesses buy inputs in large amounts in order to receive discounts which reduces average cost
What is technical economies of scale?
large company invests in equipment that makes the business more efficient which reduces average cost
What is external economies of scale?
achieving lower average costs by factors outside of the business
What are some reasons for external economies of scale and explain?
Innovation; an industry becomes significant for society which allows for collboration and reduces average cost
Infrastructure; good transporation helps workers increase productivity
Specialisation; companies start focusing on a particular industry due to its size
What is diseconomies of scale?
increase in scale of output but also increase in average costs
What is internal diseconomies of scale?
increase in average cost by difficulty in managing internal large operations
What are situations in which internal diseconomies of scale could happen?
managerial issues, increase in size of workforce, communication
What is external diseconomies of scale?
increase in average cost due to expansion of industry that the business operates in
What are examples in which external diseconomies of scale could happen?
Limited natural sources due to expanded industry, limited infrasturcture, increased regulation, pollution
