Economies and Diseconomies of scale Flashcards
(21 cards)
Economies of scale
When a business scales (output increases) and cost per unit falls simultaneously.
Diseconomies of scale
When average costs increase with increasing output (business scaling)
At what point of output is a business not able to reduce costs any further, and beyond this level of output, there is diseconomies of scale?
Productive efficiency
As output levels _______, total productions costs _____ but, as a result of economies of scale and the costs of production being _______ ______ more units of output, the ________ costs of production _____
increase, rise, spread across, average, fall
6 types of internal economies of scale
- Financial economies
- Managerial economies
- Marketing economies
- Purchasing economies
- Technical economies
- Risk bearing economies
4 types of external economies of scale
- Geographic cluster
- Transport links
- Skilled labor
- Favorable legislation
4 types of diseconomies of scale
- Management diseconomies
- Communication diseconomies
- Geographical diseconomies
- Cultural diseconomies
Financial economies
Larger business can receive lower interest rates on loans, compared to smaller businesses, since they are perceived as less risky
Managerial economies
Large businesses are able to employ specialist managers who are more efficient at specific tasks.
Marketing economies
Large businesses can spread the cost of advertising over a large number of sales and can also reuse marketing materials in different geographical areas.
Purchasing economies
Large businesses can buy raw materials in bulk and receive a discount.
Technical economies
Large businesses can use their machine at a higher level of capacity to facilitate higher output, which spreads the cost of the machinery over more units
Risk bearing economies
Large businesses can spread the risk of business failure by increasing its number of products (e.g. through product diversification)
Geographic cluster
As a business grows, they can afford to situate themselves closer to major manufacturers in order to cut costs.
Transport Links
Large businesses can invest in improved transport links develop around growing businesses to help get people to work and overall, improve transport logistics.
Skilled labor
Large businesses can afford to have more skilled labor, which lowers the cost of skilled labor on average.
Favorable legislation
Governments are more likely to support larger businesses to achieve their own wider objectives.
Management Diseconomies
When managers work more in their self-interest than in the interest of the firm.
Communication Diseconomies
When large businesses’ organizational structure has more layer resulting in communication difficulties.
Geographical Diseconomies
When a large business has operations across multiple geographical locations, leading to logistical and communication challenges.
Cultural Diseconomies
When a large business expands into foreign markets which have different work or productivity norms which can potentially, lead to disruption in production.
