3.5 (B) - economies and diseconomies of scale Flashcards Preview

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Flashcards in 3.5 (B) - economies and diseconomies of scale Deck (20)
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1
Q

What are the 2 types of economies of scale

A

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

2
Q

What are the 5 types of internal EOS

A
Marketing
Purchasing
financial
Technical
Risk-bearing
3
Q

What is marketing EOS

int or ext

A

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.

4
Q

What are purchasing EOS

int or ext

why?

A

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

5
Q

What are financial EOS

int or ext

why?

A

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.

6
Q

What are Technical EOS

int or ext

why?

A

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

7
Q

Risk bearing EOS

int or ext

why?

A

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

8
Q

What is diversification

A

Producing a varied range of products and expanding into different consumer markets to reduce market risks.

9
Q

What are external EOS

A

cost advantages that arise because of factors outside of the firm

other firms in the industry may benefit from them as well

10
Q

List the external EOS

A

Access to skilled workers
Shared infrastructure
Suppliers can benefits from EOS
Benefit from specialist service providers

11
Q

Explain access to skilled workers

ext eos

A

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.

12
Q

Explain ‘suppliers benefit from eos’

ext eos

A

As industry supply grows, suppliers can expand as well. This would allow them to offer lower prices without cutting their profit margins.

13
Q

What are agglomeration economies

what does it result in

A

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.

14
Q

What are diseconomies of scale

A

A business grows too large and then its average costs rise.

15
Q

List the deos

A
management
communication
labour
supply constraints
skill shortages
regulatory risks
16
Q

What is management deos
why
what does it cause

A

why?
Controlling and coordinating production of a large firm can be difficult esp if firm sells a wide variety of products in diff locations. Large firms can have thousands of employees and many diff layers of management

what does it cause?
Can cause communication problems, slow communication, disagreement between managers at diff levels.

17
Q

What are labour deos

what can it cause

A

Hard for managers to stay in contact with employees in a large firm since there are so many.

may result in employee feeling like their thoughts and ideas aren’t valued which could reduce motivation, output, quality, etc.

18
Q

What are supply constraint deos

A

Large firms may require a large quantity of materials, components, or power for production, which they may not be able to get because of supply shortages, or may have to pay extra.

19
Q

What is skill shortage deos

A

Large firms can’t attract enough workers with the right skills and therefore they will have to train their current employees which would be an added cost and will have to increase their wages so that the trained employees don’t leave or go to rival firms.

20
Q

What is regulatory risk deos

A

Large firms may attract the attention of govt. if they dominate market supply, don’t let small firms compete or dictate prices.

Govt. may interfere which would affect cost of production