TOPIC 5.1: Economies and Diseconomies of Scale

What are economies of scale?

- A) Rising average costs as output increases

- B) Falling average total costs as output increases

- C) Costs that stay the same regardless of output

- D) The maximum output a business can achieve

- E) The minimum output for profitability

B** - Falling average total costs as output increases

Internal economies of scale occur when:

- A) External factors reduce costs

- B) The business grows and becomes more efficient internally

- C) The government provides subsidies

- D) Competitors reduce their prices

- E) The economy improves

B** - The business grows and becomes more efficient internally

Which of the following is an example of an internal economy of scale?

- A) A new motorway reduces transport costs

- B) The business buys raw materials in bulk at a discount

- C) The government reduces corporation tax

- D) Interest rates fall

- E) A competitor goes out of business

B** - The business buys raw materials in bulk at a discount

Diseconomies of scale occur when:

- A) Average costs fall as output increases

- B) Average costs rise as output increases

- C) Costs stay the same regardless of output

- D) The business makes higher profits

- E) The business becomes more efficient

B** - Average costs rise as output increases

Falling average total costs as output increases are called ____________________ of scale.

Economies

Rising average costs as output increases are called ____________________ of scale.

Diseconomies

What are the limits of growth (diseconomies of scale)?

Communication problems (messages get lost)

- Control problems (harder to manage)

- Coordination problems (departments don't work together)

- Motivation problems (workers feel unappreciated)