2.1.1 Growth Flashcards
Economy of scale
Reduction in the average costs of production brought about an increase in the size and scale of output (internal/external)
External economies of scale
Reduce production costs for all businesses in the industry
MES
minimum efficient scale
Lowest level of output at which costs are being minimised
Corporate culture
Set of important assumptions that are shared by people working in a particular business and influence the ways in which decisions are taken there
growth as a business objective
Growth is a key objective for any business. It is a route to increasing profits and a reflection of a successful business
- Objective of growth is to increase sales, turnover and profit
- Ideas of growths depends on stakeholder groups (employees want higher wages for growth/promotion/job stability, while shareholders want more dividends)
economies of scale
profit and competitive advantage
- Economies of scale are the benefits obtained by an organisation as it increases size. They are the factors that cause the average cost of production to fall as output increases
- Businesses can keep existing price for a lower average cost, so they gain profit, which can be reinvested into the business to generate more growth
- They can cut prices and maintain profit levels, to gain a competitive advantage over its rival in terms of increased sales
internal EoS
- Expansion of firm itself
- Lowers long run average cost
- Range of economies
external EoS
- Expansion of the industry
- Benefits most/all firms
purchasing economies of scale (internal)
- Bulk buying, savings on transport and delivery costs
- Bigger firms have an overall lower average fixed costs
- This is especially true for manufacturers, who have large FC
marketing economies of scale (internal)
fixed costs and output
- Fixed cost of advertising is spread over a wider output so firms can afford methods like TV adverts which are most effective (local bookshop vs waterstones)
- Larger firms can afford their own market research
technical economies of scale (internal)
efficiency, why are they a good investment
- Large scale machinery is more efficient (double decker vs single decker)
- Large scale machinery (production lines) are very costly and have higher fixed costs so they need a larger output, good for big firms as they can afford this machinery
- Can have specialist machinery (DoL, Specialisation) to increase efficiency in production → more complex production = more specialised and expensive equipment becomes, and only big firms can afford these capital items and use them efficiently → high cost spread over a larger output
managerial economies of scale (internal)
- Can use specialist managers with particular skills, human equivalent of using specialised equipment and machinery
financial economies of scale
- Larger firms attract finance more easily as the are perceived as lower risk, so lower interest rates
- Can access more sources of finance (plc can sell stocks on stock exchange etc)
risk bearing economies (internal)
- When bigger businesses diversify or supply more than one market
- Spreads risk as the business is not reliant on just one product or market
bulk buying (internal)
- A larger business can negotiate lower input prices
- Average cost per unit can be reduced
external economies of scale
- Economies of scale lead to falling costs and prices
- Products become affordable
We all have more purchasing power - A mass market develops as more people are able to afford the product
- Standards of living rise
3 types of external economies of scale
- When firms are large, governments may build new supporting infrastructure and other institutions may provide support services (manchester met and fashion course)
- Development of research and development facilities in local universities that several businesses in an area can benefit from
- Spending by a local authority on improving the transport network for a local town or city
- Relocation of component suppliers and other support businesses close to the main centre of manufacturing are also an external cost saving
economies of scale in the LR
- In the LR all production costs are variable
- Therefore, the scale of production can change
- Economies of scale are the unit cost advantages from expanding the scale of production in the long run
- These lower unit costs represent an improvement in long run productive efficiency and they can give a business a significant advantage in a market
- They can lead to lower prices for consumers and higher profits (ie producer surplus)
when do diseconomies of scale occur
- There are problems in monitoring productivity and work quality, increasing wastage of scarce resources → control
- Workers in a larger forms may develop a sense of alienation and loss of morale, they may have little autonomy on how they approach tasks/projects → cooperation
- Negative effects of internal policies, information overload, unrealistic expectations held by managers and cultural clashes between senior people with inflated egos
diseconomies of s and rising costs
- Business is beyond their optimum size
- Businesses are suffering from productive inefficiency
- Higher unit costs will reduce total profits
- Businesses may then have to charge higher prices in order to cover costs
- Demand can contract, loses competitive advantage, fall in share price
examples of diseconomies of scale
- Mistakes are often made, and large firms make large mistakes
In comparison, smaller businesses may be better at adapting quickly to changes in dynamic markets - Large firms can be less flexible and so are slow to react to change
- Growth can lead to geographical problems, logistical difficulties and increased transport costs
- New tech can reduce MES
- big/Merged businesses will restructure → split or sell part of the business to avoid sacrificing competitive advantage
