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economies of scale
falling average costs due to expansion
diseconomies of scale
rising average costs when a firm becomes too big
internal economies of scale
cost benefits that an individual firm can enjoy when it expands
bulk buying
buying goods in large quantities, usually cheaper than buying in small quantities
external economies of scale
cost benefits that all firms in an industry can enjoy when the industry expands
bureaucracy
system of administration that uses a large number of departments and officials
internal economies of scale examples
purchasing/ marketing/ technical/ financial/ managerial/ risk bearing
purchasing economies of scale
large firms buying many resources recieve cheaper rates; suppliers offer discounts to firms buying raw materials and components in bulk( bulk buying is a purchasing economy)
marketing economies of scale
occur as some marketing costs( e.g. an advert) are fixed; can be spread over more units of output for a larger firm; average costs of an advert is smaller for a large firm
technical economies of scale
can occur as large factories are more efficient than smaller ones( more specialisation occurs and more investment put into machinery); large firms may make better use of an essential resource( e.g. machinery) compared to a smaller firm; resource utilised more to lower average costs
financial economies of scale
wider variety of sources of money( e.g. shares which are unavailable to a sole trader); pressure can be put on banks when negotiating prices of loans( banks are more likely to lend large amounts to large companies at lower interest rates)
managerial economies of scale
expanding firms can afford specialist managers, improving efficiency and decreasing average costs, whilst small businesses may employ general managers in charge of several areas, who may find the row demanding and be weak in some areas of the job
risk bearing economies of scale
wider product ranges and wider variety of markets reduces the risk in business
external economies of scale examples
skilled labour/ infrastructure/ access to suppliers/ similar businesses in the area
skilled labour
if an industry is concentrated in one area, there may be a build- up of labour with skills/ work experience required by the industry leading to lower training costs to recruit workers as local schools/ colleges may be providing vocational courses required by the local industry
infrastructure
particular industry dominating a region means that facilities will be shaped to suit the industry’s needs
access to suppliers
established industry in a region will encourage suppliers in that industry to set up close by, benefitting all firms
similar businesses in the area
firms in the same industry located close to each other are likely to cooperate with ech other for collective profit
diseconomies of scale examples
bureaucracy/ communication problems/ lack of control/ distance between top management and workers at the bottom of the organisation
bureaucracy
too many resources used in administration, leading to slow decision making and long communication channels, raising average costs
communication problems
large organisations may have workers across the world; time differences and language barriers in different countries
lack of control
difficult to control and coordinate, many employees and plants require more supervision and layers of management, raising costs
distance between top management and workers at the bottom of the organisation
relations between managers and workers in large firms may worsen, as they are unaware of the needs of those at the bottom of the organisation, leading to demotivated workers, conflict, and wasted resources to resolve
