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

Internal economies of scale is when there are reductions in average cost per unit of output as a result of increasing internal efficiencies of the business. There are 5 types of internal economies of scale, these are:
purchasing
managerial
financial
marketing
technical.

Question 3

External economies of scale

Answer 3

The largest businesses often benefit from external economies of scale, especially if the industry is concentrated in one geographical area.
Supplier economies - 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.
Educational economies - 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 who make up the industry concerned.
Financial economies - financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a given industry. For example, for an industry where cash flow may be a particular problem, debt factoring services may be made available at competitive rates.

Question 4

Benefits of economies of scale

Answer 4

Reduction in the business unit cost this allow the free up additional capital in which the business can use to develop other areas of its operations

This improves the efficiency

Question 5

Diseconomies of Scale

Answer 5

Diseconomies are the factors that cause higher costs per unit of output when the scale of an organisation continues to increase - it is a cause of inefficiency in large organisations.
When diseconomies occur, the average costs of production rise with output. Like economies of scale, diseconomies can be both internal and external.

Question 6

diseconomies of scale (internal and external)

Answer 6

diseconomies of scale
Diseconomies are the factors that cause higher costs per unit of output when the scale of an organisation continues to increase - it is a cause of inefficiency in large organisations.
When diseconomies occur, the average costs of production rise with output. Like economies of scale, diseconomies can be both internal and external.

Internal diseconomies of scale
There are three main types of internal diseconomies of scale, these are:
Coordination issues - the larger an organisation becomes, the more difficult it is to coordinate. Inevitably, there is a good deal of delegation and this empowerment of more and more managers to make their own decisions can result in different departments heading in different directions. To counter this, numerous management meetings have to be held. The time that managers spend in meetings, in an attempt to ensure better coordination within large organisations, can be viewed as a significant overhead cost.
Communication issues - as an organisation grows and levels of hierarchy increase, the efficiency and effectiveness of communication breaks down. This leads to an increase in misunderstanding and inefficiency as each level of hierarchy grows further and further apart and messages become distorted, resulting in increasing average costs.
Motivation issues - with larger businesses it is harder to satisfy and motivate workers as many may feel that their views are ignored because of how distanced they are from the organisation’s decision makers. This means that they may not give their best as they are not focused on the organisation’s aims and objectives.
These diseconomies of scale are often qualitative in nature and are difficult to measure financially - nonetheless, they still reduce the efficiency of the organisatio

Question 7

External diseconomies of scale

Answer 7

An increase in the average costs of production as a firm grows due to factors beyond its control. Overcrowding in industrial areas - traffic congestion may occur, resulting in late deliveries and staff arriving late for work. Local residents may resent this and therefore public relations could suffer.
Increased price of resources - 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.