Economies Of Scale

Question 1

What are internal economies of scale?

Answer 1

Occurs when firms become larger. Average costs of production fall as output increases.
- technical economies —> larger firms can afford to invest in more advanced and productive machinery, division of labour
- marketing —> divide marketing costs across larger outputs/spread over many units (e.g. Mcdonals can, but local chippy can’t)
- managerial —> able to specialise their managers, so they have better knowledge and skills, so more efficient
- financial —> banks are more willing to loan more money with lower rates of interest as large firms are seen as less risky
- purchasing —> bulk buying saves a lot of money as each unit will cost less

Question 2

What are external economies of scale?

Answer 2

• when the whole industry grows larger and firms benefit from lower long-run average costs
• occur because skilled labour in certain areas (e.g. if somewhere is a hotspot for a certain industry, moving firm there will attract skilled workers for that industry)
• transport links - firms can take advantage of existing roads and infrastructure to get lower average costs

Question 3

What are diseconomies of scale?

Answer 3

When output passes a certain point and average costs start to increase per extra unit of output produced
- control - harder to monitor how productive the workforce is
- coordination - complicated to coordinate every worker when there is lots
- communication - workers loose motivation as may start to feel alienated or excluded