Economies and Diseconomies of Scale Flashcards
(23 cards)
What happens when the Output of a firm increases
Costs initially decrease
What are economies of scale?
falling average costs due to increased output
What are economies of scale?
-a fall in LRAC as output increases
What are the 6 economies of scale?
Marketing
Technical
Managerial
Risk Bearing
Purchasing (Bulk buying)
Financial
What is diversification?
When firms have a variety of goods and services
What are risk-bearing EOS?
When the risks a firm experiences decreases when having diversification.
Therefore costs associated with risks are lower.
Therefore average costs lowers.
What are financial EOS?
-as there is an increase in output
-firm has access to higher scale loans as they become larger
-access to lower interest rate loans as default risk generally lower with big firms
-leads to a fall in LRAC
What do specialists do?
Specialists provide specific skills and help improve efficiency so that businesses can gain a competitive advantage
What are managerial EOS?
-as output increases
-firm can employ more specialist workers
-therfore, they are more productive than general workers(in small firms)
-therefore, LRAC decrease
What are Technical EOS?
Chain of reasoning
-as output increases
-firms can use larger machines which are more efficient
-(compared to manual labour)
-eg, car companies using a production line
-therefore, LRAC decrease
What are marketing EOS?
-as output increases
-leads to firm having access to more efficient types of marketing
-eg, sponsoring the olympics
-therefore, cheaper per person that sees it
-so, a fall in LRAC occurrs
What are purchasing EOS?
-as output increases
-so the firms can place a larger order w suppliers
-so they become a more important customer
-therefore, they can negotiate discounts
-so, a fall in LRAC occurs.
What are external EOS?
-a fall in LRAC as size of industry increases
What are Skilled Labour external EOS?
-as size of the industry increases
-easier to find skilled workers
-more important to the local economy so local colleges will offer more courses to prep
-firms can hire already specialised workers without spending money on training them
-so, a fall in LRAC occurs.
What are Infrastructure External EOS?
-as size of the industry increases
-therefore, govnmnt more likely to pay for infrastructure useful to industry.
-(Eg, silicon valley, technology)
-better infrastructure leads to increase in productivity
-so, a fall in LRAC occurs.
What are access to suppliers external EOS?
-as size of the industry increases
-more producers will set up in the area
-(eg, actors in hollywood)
-therfore decreases transport costs
-firms find easier to access supplies
-so, a fall in LRAC occurs.
What are “Similar Businesses in the area” external EOS?
-as size of the industry increases
-more firms in same area means it is easier to find skilled workers around
-therefore recruitment costs decrease as firms could share good practice
-therfore prod increases
-so, a fall in LRAC occurs.
What are diseconomies of scale?
-an increase in LRAC as output increases
What are bureaucracy DEOS?
-as size of the firm increases
-more layers of management
-management processes take longer
-there is a time delay
-so, a rise in LRAC occurs.
What are communication problems DEOS?
-as size of the firm increases
-therefore more employees so comms is difficult
-if operating in multiple countries (to try obtain risk bearing EOS) there could be a language barrier
-decrease in prod
-so, a rise in LRAC occurs.
What are Lack Of Control DEOS?
-as size of the firm increases
-more difficult for managers to know everything going on
-so more people employed for layers of management
-so, a rise in LRAC occurs.
What are distance between senior staff and shop workers DEOS?
-as size of the firm increases
-more layers of management
-so workers have less contact with senior managers
-so less motivation to work so less prod
-so, a rise in LRAC occurs.
What are the different reason for External EOS
Similar businesses in Area
Skilled Labour
Access to supply
Infrastructure
