economies of scale Flashcards
define economies of scale
occur for a firm when an increase in the scale of production leads to production at lower long-run average cost
define internal economies of scale
economies of scale that arise from the expansion of a firm
define external economies of scale
economies of scale that arise from the expansion of the industry in which a firm is operating
define technical efficiency
attaining the maximum possible output from a given set of inputs
define cost efficiency
the appropriate combination of inputs of factors of production, given the relative prices of those factors
what are Technical economies of scale?
1) Production line methods reduce average costs
2) Specialised equipment reduces average costs
3) In a larger firm workers can specialise to a greater extent lowering average cost (division of labour)
4) Containerisation reduces average costs
what are Purchasing economies of scale?
- Large firms can buy in bulk; his reduces costs because suppliers can produce in large quantities and so reduce their own costs (bulk buying)
- Larger firms need larger quantities of raw materials so can negotiate discounts, lowering average costs
what are managerial economies of scale?
- Specialist managers (e.g. finance, production, customer service) gain expertise and experience leading to better decisions
- Number of managers needed increases more slowly than output, lowering average cost
what are financial economies of scale?
Larger firms can often borrow money at a lower interest rate as banks pass on their own economies of scale and lending is less risky, reducing average cost
what are risk bearing economies of scale?
Larger firms can diversify into different product areas, confident that some will succeed – only a larger firm may be able to afford to take the risk
what are marketing economies of scale?
- Advertising is a fixed cost so, as more output is produced, the cost to advertise per unit falls
- Larger firms benefit from brand awareness so need to advertise less
what internal economies of scale are there?
- Managerial
- Marketing
- Financial
- Risk Bearing
- Technical
- Purchasing
what external economies of scale are there?
- more skilled labour
- more regional capital
explain more skilled labour in external economies
- A larger industry has a larger pool of skilled labour so a firm can hire labour more cost effectively because spending on training will be lower
- Local colleges may start to offer qualifications needed by big local employers, reducing firms’ training costs
explain more regional capital in external economies
- Larger companies locating in an area may lead to improvements in road networks or local public transport
- Improvements in local infrastructure may be negotiated by the firm before locating/expanding in the area
- If firms do similar or related activities, they may be able to share resources such as research facilities
- Suppliers may locate near to larger firms, reducing transport costs which lower average costs that are then passed on to the larger firm