3.2.1 Objectives of growth

Question 1

Define internal economies of scale?

Answer 1

reduction in average cost brought about by an increase in the size of the business

Question 2

What are the 6 economies of scale?

Answer 2

Technical
Marketing 
Managerial 
Financial 
Purchasing 
Risk-Spreading

Question 3

Define external economies of scale?

Answer 3

reduction in average cost due to increase in the size of the whole industry

Question 4

Define market power?

Answer 4

the seller can have some control over the price charged.

Question 5

What 3 problems do growing business face?

Answer 5

1. Communication within the business may become harder
2. Staff motivation may decrease due to feeling less significant
3. Diseconomies of scale could occur

Question 6

Define diseconomies of scale?

Answer 6

when a business encounters cost increase that make larger scale production less efficient

Question 7

What can a business dominate if they become large enough?

Answer 7

consumers and suppliers

Question 8

If a brand becomes strong enough, what can a company do?

Answer 8

Charge higher prices
Create customer loyalty
Launch new products easily

Question 9

Define minimum efficient scale?

Answer 9

The output that minimises longterm average costs

Question 10

Define internal diseconomies of scale?

Answer 10

Caused by problems of managing large companies

Question 11

Define external diseconomies of scale?

Answer 11

Overcrowding in the industrial areas

Question 12

Define overtrading?

Answer 12

if a business grows too fast there is a danger that it might suffer from overtrading

Question 13

When is overtrading most likely to occur?

Answer 13

• If it doesn’t have enough capital
• Offers too much trade credit to consumers
• Operating with slim profit margins

Question 14

Explain what is meant by risk-bearing economies?

Answer 14

As a firm grows it may well diversify