3.5.5 Economies and Diseconomies of Scale

EOS, DOS

Economies of scale

Increased production lower costs

Diseconomies of scale

Decreased production lower costs

Internal EOS

Companys own action lower the costs

External EOS

Industry factors lowers the costs

What causes a DOS to happen

Growing too large too quickly leads to inefficiency, increasing cost per unit.

Reasons a company may turn into a DOS

Miscommunication, Workers have lack of motivation, loss of direction and coordination

Bulk buying

Buying large quantities of an item for a lower cost per unit

market captilisation

The total value of a companies shares

stock exchange

a statistic that tracks how the prices of a specific set of stocks have changed

Collective bargaining

Process by a union representing a group of workers negotiates with employer for a contract

labour

The physical and mental human effort used in the production process

capital as a factor of production

The man-made resources used by a business, in production

labour productivity formula

Output per period / number of employees per period

total cost

The total amount of money a firm uses for its production

total revenue formula

Price x quantity

total cost formula

fixed cost + variable cost

Profit

Total revenue - total cost

average cost

the total cost divided by the quantity produced

average revenue

total revenue divided by the quantity sold

financial economies of scale

Reductions in average cost as a result of being able to borrow money more cheaply

managerial economies of scale

Reductions in average cost as a result of being able to employ specialist managers who are more productive

risk bearing economies of scale

The ability of large firms to spread the costs of uncertainty over a wider range of activities and therefore reduce their unit cost.

Bureaucracy

a system for managing companies that is operated by a large number of officials employed to follow rules carefully