Economies of Scale

Flashcards reviewing vocabulary related to economies of scale.

Economies of Scale

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

Costs in the short and long run

In the short run, costs can be both variable and fixed, but in the long run all costs become variable.

External Economies of Scale

The advantages of scale that benefit a whole industry and not just an individual business

Labour

Concentration of businesses may lead to the build up of a labour force equipped with the skills required by the industry.

Supplier economies

A network of suppliers may be attracted to an area where a particular industry is growing.

Educational economies

Local colleges will set up training schemes suited to the largest employers’ needs, giving an available pool of skilled labour

Financial economies

Financial services can improve, with banks and other financial institutions providing services that may be particularly geared towards a particular industry.

Commercial services

A growing industry tends to attract smaller businesses trying to serve its needs.

Co-operation

Businesses located in the same region might join forces to fund a research and development center for the industry.

Internal Economies of Scale

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

Marketing

As businesses grow, each pound spent on advertising will have greater benefit for the business; the advertising costs are spread over more units.

Managerial

Able to employ specialist staff, likely to work more efficiently and thereby reduce the average costs of producing.

Risk-Bearing

Larger producers can spread their risks so they don't have all their 'eggs in one basket‘ and diversify into different market so that if one fails you have a back-up.

Financial

Easier to access loans as are able to offer security and negotiate more favorable rates of interest.

Technical

Machinery allows products to be made/jobs to be performed quicker with more use of division of labor/specialisation.

Purchasing

As businesses grow, they increase the size of orders for raw materials or components and this may then result in discounts being given and the cost of each individual component purchased will fall.

Diseconomies of Scale

The factors that cause higher costs per unit of output when the scale of an organisation continues to increase and the causes of inefficiency in large organisations.

Internal Diseconomies of Scale

Internal diseconomies of scale where the average cost (unit cost) increases as output expands (in the long run).

External Diseconomies of Scale

May occur from overcrowding in industrial areas – traffic congestion may occur – resulting in late deliveries and staff arriving late for work.