Diseconomies And Economies Of Scale

Question 1

Define ‘scale’

Answer 1

The size of a business

Question 2

What are ‘diseconomies of scale’?

Answer 2

rising average costs when a firm becomes too big

Question 3

What are ‘economies of scale’?

Answer 3

falling average costs due to expansion

Question 4

What are ‘internal economies of scale’?

Answer 4

cost benefits that an individual firm can enjoy when it expands.

Question 5

What is ‘bulk-buying’?

Answer 5

buying goods in large quantities, which is usually cheaper than buying in small quantities

Question 6

What is ‘bureaucracy’?

Answer 6

system of administration that uses a large number of departments and official

Question 7

What does it mean to ‘co-ordinate’?

Answer 7

to organize people or things so that they work together well

Question 8

Give an example of a purchasing economy.

Answer 8

Purchasing economies occur when large firms buy resources in bulk, leading to lower unit costs.

Question 9

How can a large firm benefit from financial economies?

Answer 9

Large firms can access money more cheaply due to a wider variety of sources and negotiate lower interest rates with banks

Question 10

What is a managerial economy?

Answer 10

when large firms can afford specialist managers, leading to improved efficiency and lower average costs.

Question 11

How can skilled labor contribute to external economies of scale?

Answer 11

Skilled labor can reduce training costs and improve efficiency if an industry is concentrated in one area.

Question 12

What is the disadvantage of large bureaucracies in terms of diseconomies of scale?

Answer 12

Bureaucracies in large firms can lead to wasted resources in administration, resulting in rising average costs.

Question 13

Describe two types of internal economies of scale.

Answer 13

• purchasing economies (buying in bulk for lower costs)
• financial economies (accessing money more cheaply).

Question 14

Explain how external economies of scale can benefit businesses in the same industry located in the same area.

Answer 14

External economies of scale can benefit businesses in the same industry located in the same area by:

• providing access to specialized suppliers
• reducing training costs for skilled labor
• improving infrastructure.

Question 15

Discuss the potential problems of communication in very large organizations.

Answer 15

Communication problems in very large organizations can arise due to language barriers, cultural differences, and time zone differences among workers in different locations.

Question 16

Why might a very large business experience diseconomies of scale in terms of lack of control?

Answer 16

A very large business may experience diseconomies of scale in terms of lack of control because it becomes difficult to coordinate and supervise thousands of employees and multiple operations around the world.