economies of scale Flashcards
(20 cards)
What is meant by economies of scale?
A reduction in average costs of production as a business increases its scale of output.
What is the difference between short run and long run costs?
In the short run, some costs are fixed, but in the long run, all costs are variable.
What are internal economies of scale?
Cost savings that result from a firm’s own growth and internal efficiencies.
Name six types of internal economies of scale.
Marketing, Managerial, Risk-bearing, Financial, Technical, Purchasing.
How do marketing economies of scale reduce costs?
Advertising costs are spread over a larger output, reducing cost per unit.
What is managerial economies of scale?
Larger firms can employ specialist staff who are more efficient.
What are risk-bearing economies of scale?
Spreading risk across different products/markets reduces dependency on one area.
What are financial economies of scale?
Larger firms can access cheaper finance and negotiate better rates.
What are technical economies of scale?
Use of advanced machinery and specialization improves productivity.
What are purchasing economies of scale?
Bulk buying allows discounts and lower cost per unit of raw materials.
What are external economies of scale?
Cost savings that benefit an entire industry due to external developments.
Give examples of external economies of scale.
- Skilled local labour
- local suppliers
- specialist training
- joint R&D investment.
What are diseconomies of scale?
Increases in average costs per unit when a firm becomes too large and inefficient.
What causes internal diseconomies of scale?
- Poor communication
- low motivation
- poor coordination
How can communication problems raise costs?
Complex structures lead to misunderstandings and inefficiencies.
How can morale affect diseconomies of scale?
Low morale in large firms leads to less commitment and productivity.
Why does coordination become a problem in large firms?
Time-consuming meetings and conflicting departmental goals add cost.
What causes external diseconomies of scale?
Overcrowding, resource price inflation, competition for workers, congestion.
How does overcrowding increase costs?
Congestion causes delays in deliveries and affects punctuality and reputation.
If large firms have economies of scale, why do small firms still survive?
- Personal service
- niche markets
- local support
- flexibility,
- low start-up costs
- loyalty
- small target market.
