Economies Of Scale

Question 1

Economies of scale

Answer 1

The reduction in average costs of production that occur as a business increases its scale of production

Question 2

internal economies of scale

Answer 2

reductions in average cost per unit of output as a result of increasing internal efficiencies of the business

Question 3

marketing IEOS

Answer 3

as businesses grow each pound spent on advertising will have greater benefit for the business- the advertising costs are spread over more units

Question 4

managerial IEOS

Answer 4

able to employ specialist staff, e.g. accountants- likely to work more efficiently and thereby reduce average costs of producing

Question 5

risk-bearing IEOS

Answer 5

larger producers can spread their risks so they don’t have all their ‘eggs’ in one basket’ diversify into different market so that if one fails you have a back-up

Question 6

financial IEOS

Answer 6

easier to access loans as are able to offer security- negotiate more favourable rates of interest

Question 7

technical IEOS

Answer 7

machinery allows products to be made/jobs to be performed quicker- more use of division of labour/specialisation

Question 8

purchasing IEOS

Answer 8

as businesses grow they increase the size of orders for raw materials or components- this may then result in discounts being given and the cost of each individual component purchased will fall

Question 9

external economies of scale

Answer 9

the advantage of scale that benefit a whole industry and not just an individual business, e.g. more skilled workforce, development of industry specific research and component suppliers

Question 10

Labour EEOS

Answer 10

the concentration of businesses may lead to the build up of a labour force equipped with the skills required by the industry

Question 11

Supplier Economies EEOS

Answer 11

a network of suppliers may be attracted to an area where a particular industry is growing- the setting up locally of supplier businesses, often in competition with one another, reduces buying costs and allows the use of systems such as just-in-time

Question 12

educational economies EEOS

Answer 12

local colleges will set up training schemes suited to the largest employers’ needs, giving an available pool of skilled labour- this reduces recruitment and training costs for those businesses

Question 13

financial economies EEOS

Answer 13

financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a particular industry- e.g. for an industry where cash flow may be a particular problem, debt factoring services may be made available at competitive rates

Question 14

commercial services EEOS

Answer 14

a growing industry tends to attract smaller businesses trying to serve its needs- a wide range of commercial and support services can be offered, such as banking, marketing, waste disposal, maintenance and distribution

Question 15

co-operation EEOS

Answer 15

businesses located in the same region might join forces to fund a research and development centre for the industry

Question 16

diseconomies of scale

Answer 16

the factors that cause higher costs per unit of output when the scale of an organisation continues to increase- the causes of inefficiency in large organisations

Question 17

internal diseconomies of scale

Answer 17

internal diseconomies of scale occur where the average cost increases as output expands- these occur when a business becomes very large

Question 18

communication IDOS

Answer 18

becomes more complex and harder to manage- misunderstandings occur leading to inefficiency

Question 19

commitment/motivation IDOS

Answer 19

morale may suffer as individual employees become a minor part of the total workforce, thus feel their views are ignored

Question 20

co-ordination IDOS

Answer 20

is more difficult and control is weakened because a large business is divided into departments- time is then spent in meetings which is a cost

Question 21

overcrowding in industrial areas EDOS

Answer 21

traffic congestion may occur- resulting in late deliveries and staff arriving late for work; local residents may resent this and public relations may suffer

Question 22

increased price of resources EDOS

Answer 22

more businesses in an area means increased demand for labour to work in that industry and the best employees may be harder to recruit and keep: land, services and materials may all become more expensive as the industry grows and demand for such resources increases

Question 23

why do small firms continue to survive?

Answer 23

•provide a personal service which is hard to do in large organisations
•happy to remain as a small business- content with the current level of profits and wish to avoid the added responsibilities and risks associated with growth
•lot more flexible in some circumstances: react quickly to changes in market conditions or technology, management can make decisions quickly
•target market size
•serving the local community
•often easy to set up- set up costs are relatively low
•customer loyalty
•often serve niche markets