Economies of scale

What are economies of scale?

Reductions in a firm’s average unit costs of production due to an increase in the scale of operations.

Why are economies of scale important for businesses?

Significant cost benefits can make it hard for smaller firms to compete in industries like oil refining and soft drink production.

What is purchasing economies?

Discounts from suppliers for bulk orders due to lower processing costs.

How do technical economies contribute to lower costs?

Access to advanced technology and higher capacity leads to lower unit costs.

What financial advantages do large businesses have?

Favorable financing terms such as lower interest rates and cheaper public financing options.

How do marketing economies benefit businesses?

Marketing costs do not increase at the same rate as sales, allowing for efficient cost spreading.

What are managerial economies?

The ability to hire specialized managers can improve efficiency and reduce costs.

What is an example of an external economy of scale?

Tax breaks and incentives from the government that reduce production costs for all firms in the industry.

What does diseconomies of scale refer to?

Factors that cause average production costs to rise as scale increases.

What are common causes of diseconomies of scale?

Communication problems, alienation of workforce, and poor coordination leading to slow decision-making.