3.5 (B) - economies and diseconomies of scale Flashcards
What are the 2 types of economies of scale
Internal - Reduce the average cost of producing each unit of output as the scale of production expands within a firm
External - reduction in average cost that arises due to factors outside of the firm
What are the 5 types of internal EOS
Marketing Purchasing financial Technical Risk-bearing
What is marketing EOS
int or ext
internal
Advertising cost per unit ges spread out through the firm’s output and is reduced.
Large firms can also buy and hire their own vehicles to distribute products instead of hiring other firms to deliver which eliminates the middle man (the other firm’s profit margin) and reduces costs.
What are purchasing EOS
int or ext
why?
int
Discounts on the purchase of raw materials and supplies.
why?
Large firms often buy raw materials in bulk because of large scale of production. Suppliers usually offer discounts since they save on transport costs (only delivering to one location). cheaper to make one large delivery than many small deliveries
What are financial EOS
int or ext
why?
Int
Large firms can borrow more moeny from banks at a lower interest rate than small firms can.
why?
Large firms are usually more financially secure and can offer more assets as collateral. Banks can sell these assets (eg property) which are very valuable.
Large firms can also sell shares to raise capital if they really need to repay.
What are Technical EOS
int or ext
why?
int
Large firms are usually more efficient since they have the financial capabilities to afford specialized machinery, equipment, highly skilled workers and ability to r&d new products and processes to increase efficiency of production.
why?
have the financial capabilities to
Risk bearing EOS
int or ext
why?
Int
firms can reduce the risk to its business of losing one or more major cusotmers or a fall in customer demand on one of its product markets.
why?
diversification
What is diversification
Producing a varied range of products and expanding into different consumer markets to reduce market risks.
What are external EOS
cost advantages that arise because of factors outside of the firm
other firms in the industry may benefit from them as well
List the external EOS
Access to skilled workers
Shared infrastructure
Suppliers can benefits from EOS
Benefit from specialist service providers
Explain access to skilled workers
ext eos
Recruitment of skilled workers becomes easier if many other firms in the industry have already trained works with the skills req by the industry.
or
universities may develop courses to train workers with specialized skills required by large and advance industries which helps reduce training cost.
Explain ‘suppliers benefit from eos’
ext eos
As industry supply grows, suppliers can expand as well. This would allow them to offer lower prices without cutting their profit margins.
What are agglomeration economies
what does it result in
Similar firms within one or more industries cluster together in the same geographical location.
results in major business customers, suppliers, skilled labour to relocate to similar area.
What are diseconomies of scale
A business grows too large and then its average costs rise.
List the deos
management communication labour supply constraints skill shortages regulatory risks
