5.1 Economies and Diseconomies of Scale

Define internal economies of scale

The reduction of average cost per unit as the output increases due to factors from the individual business.

What is the difference between internal and external economies of scale?

Internal economies of scale affects the individual business but external economies of scale affects the entire industry.

What is meant by purchasing economies of scale?

When businesses buy larger quantities of resources (in bulk) resulting in a lower cost per unit

What is meant by marketing economies of scale?

when large firms spread fixed marketing costs over a higher output, reducing the average cost per unit

What is meant by technical economies of scale?

When businesses invest in more advanced technology to improve their productivity due to their larger size

What is meant by financial economies of scale?

When a large business can negotiate better interest rates and offer more security for financial loans due to their larger size

What is meant by managerial economies of scale?

When larger businesses employ specialized managers to improve communication, coordination and motivation.

What is meant by risk-bearing economies of scale?

When a large firm is able to spread the risk of failure by diversifying their products, markets, suppliers, reducing the overall cost

What is meant by the term diseconomies of scale?

The increase of average cost per unit as output increases

What are 3 examples of diseconomies of scale?

Communication, Coordination, Motivation