economies of scale

Question 1

define economies of scale

Answer 1

occur for a firm when an increase in the scale of production leads to production at lower long-run average cost

Question 2

define internal economies of scale

Answer 2

economies of scale that arise from the expansion of a firm

Question 3

define external economies of scale

Answer 3

economies of scale that arise from the expansion of the industry in which a firm is operating

Question 4

define technical efficiency

Answer 4

attaining the maximum possible output from a given set of inputs

Question 5

define cost efficiency

Answer 5

the appropriate combination of inputs of factors of production, given the relative prices of those factors

Question 6

what are Technical economies of scale?

Answer 6

1) Production line methods reduce average costs

2) Specialised equipment reduces average costs

3) In a larger firm workers can specialise to a greater extent lowering average cost (division of labour)

4) Containerisation reduces average costs

Question 7

what are Purchasing economies of scale?

Answer 7

• Large firms can buy in bulk; his reduces costs because suppliers can produce in large quantities and so reduce their own costs (bulk buying)
• Larger firms need larger quantities of raw materials so can negotiate discounts, lowering average costs

Question 8

what are managerial economies of scale?

Answer 8

• Specialist managers (e.g. finance, production, customer service) gain expertise and experience leading to better decisions
• Number of managers needed increases more slowly than output, lowering average cost

Question 9

what are financial economies of scale?

Answer 9

Larger firms can often borrow money at a lower interest rate as banks pass on their own economies of scale and lending is less risky, reducing average cost

Question 10

what are risk bearing economies of scale?

Answer 10

Larger firms can diversify into different product areas, confident that some will succeed – only a larger firm may be able to afford to take the risk

Question 11

what are marketing economies of scale?

Answer 11

• Advertising is a fixed cost so, as more output is produced, the cost to advertise per unit falls
• Larger firms benefit from brand awareness so need to advertise less

Question 12

what internal economies of scale are there?

Answer 12

• Managerial
• Marketing
• Financial
• Risk Bearing
• Technical
• Purchasing

Question 13

what external economies of scale are there?

Answer 13

• more skilled labour
• more regional capital

Question 14

explain more skilled labour in external economies

Answer 14

• A larger industry has a larger pool of skilled labour so a firm can hire labour more cost effectively because spending on training will be lower
• Local colleges may start to offer qualifications needed by big local employers, reducing firms’ training costs

Question 15

explain more regional capital in external economies

Answer 15

• Larger companies locating in an area may lead to improvements in road networks or local public transport
• Improvements in local infrastructure may be negotiated by the firm before locating/expanding in the area
• If firms do similar or related activities, they may be able to share resources such as research facilities
• Suppliers may locate near to larger firms, reducing transport costs which lower average costs that are then passed on to the larger firm

Question 16

which internal economies is dependant on specialisation?

Answer 16

• Purchasing economies
• Technical economies
• R&D economies

not

• Risk bearing
• Financial economies
• Managerial economies
• Marketing economies

Question 17

all external economies of scale are dependant on…

Answer 17

specialisation

Question 18

analysis of internal economies, purchasing economies

Answer 18

As a firm grows and sales increase, it can bulk buy factor inputs at a lower average cost – and so the firm benefits from purchasing economies of scale.

Question 19

analysis of external economies, regional capital

Answer 19

When a firm expands and becomes large enough, it can benefit from regional capital by working with local educators to design training courses for potential employees. This leads to more highly skilled workers for the firm at lower cost.

Question 20

evaluation: causes and significance

Answer 20

Causes
Larger industries tend to have more scope for economies of scale; firms can benefit from more economies of scale, and there is more scope to benefit from each. (There are no large hairdressing firms, but several large oil firms)

Significance
The existence of economies of scale and, over time, the more successful utilisation thereof, is a major part of why standards of living continue to rise.