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What are economies of scale ?
They are the advantages that can sometimes occur as a result of increasing the size of a business
What are internal economies of scale ?
They are the efficiencies that occur as a result of the growth in the scale of production within the business
What are the different types of internal economies of scale ?
Financial economies
Managerial economies
Marketing economies
Purchasing economies
Technical economies
Risk bearing economies
What are financial economies ?
Large firms often receive a lower interest rates on loans than smaller firms as they are perceived as being less risky
A cheaper loan lowers the cost per unit
What are managerial economies ?
Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost
What are marketing economies ?
Large firms spread the cost of advertising over a large number of slaes and this reduces the average cost
They can also reuse marketing materials in different geographic regons which further lowers the average cost
What are purchasing economies ?
Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount which lowers the average cost
What are technical economies ?
Occurs as a firm can use its machinery at a higher level of capacity due to the increased output thereby spreading the costs of the machinery over more units and lowering the average cost
What are risk bearing economies ?
Occur when a firm can spread the risk of failure by increasing its numbers of products
What are external economies of scale ?
It occurs when there is an increase in the size of the industry in which the firm operates
What are the external economies of scale ?
Geographic cluster
Transport links
Skilled labour
Favourable legislation
Explain geographic cluster
As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more businesses
This lowers the average cost
Explain transport links
Improved transport links develop around growing industries to help get people to work and to improve the transport logistics
This lowers the average cost
Explain skilled labour
An increase in skilled labour can lower the cost of skilled labour, thereby lowering the average cost
The larger the geographic cluster, the larger the pool of skilled labour
Explain favourable legislation
This often generates significant reductions in average cost as governments support certain industries to achieve their wider objectives
What are diseconomies of scale ?
As a firm continues increasing its scale of output, its average costs per unit will start to increase at some point
What are the different types of diseconomies of scale ?
Management diseconomies
Communication diseconomies
Geographical diseconomies
Culture diseconomies
What are management diseconomies ?
Occur when managers work more in their self interest than in the interest of the firm
What are communication diseconomies ?
Occur when a firm’s organisational structure becomes more complex with multiple layers of management resulting in communication difficulties
This leads to slow responses and increased average costs
What are geographical diseconomies ?
Occur when a firm has widespread bases of operations across multiple geographic locations
This leads to logistical and communication challenges which can raise average costs
What are cultural diseconomies ?
Occur when a firm expands into foreign markets in which workers have very different work or productivity norms
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