Economies Of Scale

Question 1

Define economies of scale.

Answer 1

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

Question 2

Define internal economies of scale.

Answer 2

Reductions in average costs per unit of output as a result of increasing internal efficiencies of the business.

Question 3

What are the internal economies of scale ?

Answer 3

1. Purchasing economies
2. Technical economies
3. Financial economies
4. Managerial economies
5. Marketing economies

Question 4

Define purchasing economies.

Answer 4

As a business grows they increase the size of the orders for raw materials or components resulting in discounts given and costs of each component purchased will fall, reducing average costs of production e.g. bulk buying.

Question 5

Define technical economies.

Answer 5

As businesses grow they are able to purchase the latest equipment and incorporate new methods of production increasing efficiency and productivity, reducing average costs of output.

Question 6

Define financial economies.

Answer 6

As businesses grow they will have access to a wider range of finance, as the assets grow they are able to offer more security when seeking to borrow money which reduces the risk to the lender causing larger businesses to negotiate more favourable rates of interest.

Question 7

Define managerial economies.

Answer 7

As businesses grow they are able to employ specialist managers who will know how to get the best value for each pound spent whether in production, marketing or purchasing increasing efficiency and reducing average costs of production and selling goods on offer.

Question 8

Define marketing economies.

Answer 8

As businesses grow each pound spent on advertising will have greater benefit for the business e.g. if there were 10 stores the cost of adverts must be borne by each of the stores however if they have 20 stores the cost will be spread across each of the 20 stores.

Question 9

Define external economies of scale.

Answer 9

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

Question 10

What are external economies of scale ?

Answer 10

1. Supplier economies
2. Educational economies
3. Financial economies

Question 11

Define supplier economies.

Answer 11

A network of suppliers may be attracted to an area where a particular industry is growing, the setting up locally of suppliers often in competition reduces buying costs and allows the use of systems such as JIT.

Question 12

Define educational economies.

Answer 12

Local colleges will set up training schemes suited to the largest employer’s needs, giving an available pool of skilled labour reducing recruitment and training costs.

Question 13

Define financial economies (external).

Answer 13

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

Question 14

Define diseconomies of scale.

Answer 14

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, average costs of production rise with output.

Question 15

Define coordination issues (internal).

Answer 15

The larger an organisation, the more difficult it is to coordinate and inevitably there is a good deal of delegation and empowerment of more managers to make their own decisions resulting in different departments heading in different directions.

Question 16

Define communication issues (internal).

Answer 16

As an organisation grows and levels of hierarchy increase the efficiency and effectiveness of communication breaks down leading to increasing misunderstandings and inefficiency as each level grows further apart and messages become distorted increasing average costs.

Question 17

Define motivation issues (internal).

Answer 17

With larger businesses it is harder to satisfy and motivate workers as many may feel that their views are ignored as they distanced from the decision makers meaning they might not give their best as they aren’t focused on aims and objectives.

Question 18

Define overcrowding in industrial areas (external).

Answer 18

Traffic congestion may occur resulting in late deliveries and staff arriving late for work and local residents may resent this and public relations may suffer.

Question 19

Define increased price of resources (external).

Answer 19

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, materials may all become more expensive as the industry grows and demand for resources increases.

Question 20

Factors leading to the survival of small businesses.

Answer 20

1. Target market size - potential sales suited e.g. dog grooming services.
2. Population density - large businesses need large target markets, if they don’t exist then market is left to small businesses.
3. Quality of service and product - often added value aspect that justifies higher prices.
4. Customer loyalty - loyalty to local shops and service providers.
5. Niche markets - sometimes the segment is too small to be worthwhile to big businesses or the product is legally protected for a period of time.