2.1.1 Growth Flashcards
(20 cards)
Objectives of growth
To achieve economies of scale (internal & external)
When does internal economies of scale occur
This occurs when a firm becomes larger - Average cost of production fall as output increases
Examples of internal economies of scale can be remembered with the mnemonic Really Fun Mums Try Making Pies which stands for:
R: Risk-bearing
F: Financial
M: Managerial
T: Technological
M: Marketing
P: Purchasing
How is ‘risk bearing’ an example of internal economies of scale
When a firm becomes larger, they can expand their production range.
Therefore, they can spread the cost of uncertainty. If one part is not successful, they have other parts to fall back on.
How is ‘Financial’ an example of internal economies of scale
Banks are willing to lend loans more cheaply to larger firms, because they are deemed less risky. Therefore, larger firms can take advantage of cheaper credit.
How is ‘Managerial’ an example of internal economies of scale
Larger firms are more able to specialise and divide their labour. They can employ specialist managers and supervisors, which lowers average costs.
How is ‘Technological’ an example of internal economies of scale
Larger firms can afford to invest in more advanced and productive machinery and capital, which will lower their average costs.
How is ‘Marketing’ an example of internal economies of scale
Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm.
How is ‘Purchasing’ an example of internal economies of scale
Larger firms can bulk-buy, which means each unit will cost them less. For example, supermarkets have more buying power from farmers than corner shops, so they can negotiate better deals.
When does external economies of scale occur
These occur within the industry e.g.
local roads might be improved, so transport costs for the local industries will fall.
What happens to average cost after the optimum level of output, where average costs are at their lowest
average costs rise due to diseconomies of scale
The point of lowest LRAC is the minimum efficient scale; what does this mean
This is where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised.
Market power:
Large firms have more dominance over the market, which allows them to gain price setting powers and discourage the entrance of new firms.
What does it mean if a firm increases their brand loyalty
Demand becomes more inelastic
Profit motive:
By growing, firms get the opportunity to earn higher profits. Growing also allows firms to take advantage of economies of scale, providing they do not grow so large that they experience diseconomies of scale.
Problems that arise from growth (there’s 2 on here)
- Diseconomies of scale
- Potential skills shortages
When does Diseconomies of scale occur
These occur when output passes a certain point and average costs start to increase per extra unit of output produced.
Examples of diseconomies of scale
- Control: It becomes harder to monitor how productive the workforce is, as the firm becomes larger.
- Coordination: It is harder and complicated to coordination every worker, when there are thousands of employees.
- Communication: Workers may start to feel alienated and excluded as the firm grows.
This could lead to falls in productivity and increases in average costs, as they lose their motivation.
Potential skills shortages
This might lead to higher wages since firms have to compete to attract scarce employees. This is because the demand for labour exceeds supply.
The role of corporate culture
Shared values of a firm or workplace; the implicit beliefs and norms that influence all aspects of working life within a firm; and the day-to-day behaviour of employees.
