Economies of Scale

Question 1

What are the six internal economies of scale?

Answer 1

1. Technical
2. Purchasing
3. Marketing
4. Financial
5. Managerial
6. Risk bearing

Question 2

How does technical economies of scale happen?

Answer 2

A business has lower average costs of production because it can use:

1. Division of labour and specialisation
2. Afford large specialised, technically advanced automated machinery
3. Use mass production to speed up and increase production

Question 3

How does purchasing economies happen?

Answer 3

1. Buying materials more cheaply taking advantage of bulk discounts - buying in bulk gains a discounted price
2. Employ trained buyers in order to negotiate the best deals

Question 4

How does marketing economies happen?

Answer 4

1. Firms can afford to advertise extensively as the additional cost per unit is small when spread over a massive output
2. Specialist sales and customer service staff can negotiate a better price
3. The transport cost of distributing the massive output makes it cheaper too

Question 5

How does financial economies happen?

Answer 5

1. Firms borrow more easily as perceived as more credit worthy by lenders
2. Large firms can negotiate loans at more favourable interest rates as operating on such a large scale
3. Can afford to use services such as accountants and other advisors which helps cut tax bills

Question 6

How does managerial economies happen?

Answer 6

1. Can spread high costs of specialist managers over a greater number of units of production
2. Firms can afford higher salary packages necessary to recruit the best (specialist) managers
3. Can afford to install sophisticated computerised systems for communication and controlling and monitoring the business

Question 7

How does risk bearing economies happen?

Answer 7

1. Firms can afford to take more risks with launching new products, as with a diversified range of products they will always have others to fall back on
2. Can afford a research and development department

Question 8

What are the four internal diseconomies of scale?

Answer 8

1. Decisions and co-ordination
2. Communication problems
3. Staff problems
4. Transport costs

Question 9

How does the decisions and co-ordination diseconomies occur?

Answer 9

1. The business is so big that it takes a long time to make decisions.
2. The large numbers layers of management results in slow communication of decisions - chains of command too long

Question 10

How does communication diseconomies occur?

Answer 10

1. Chains of command become so long that communication between the top and bottom results in poor communication.
2. Communication between customers and staff also falls

Question 11

How does staff problems diseconomies occur?

Answer 11

1. Workers are demotivated due to poor communication.

2. Workers lose focus and productivity falls

Question 12

How does transport diseconomies occur?

Answer 12

1. Big firms are often on various different sites - transport costs rise as materials and staff have to move between multiple sites

Question 13

What is external economies of scale?

Answer 13

It is a result from the growth of the whole industry which benefit firms within the industry.

External economies shift the long run average cost curve for a firm downwards.

Question 14

Examples of external economies?

Answer 14

1. Construction of better roads and infrastructure due to growth of an industry in a particular region
2. More skilled workers due to industry specific training in colleges and universities as industry grows within a region.