economies of scale
large firms produce goods more cheaply than small firms
the size of a firm affects cost of production
increased firm size = falling average costs
diseconomies of scale
beyond 70000 units, average costs start to rise
average costs rise in larger firms due to inefficiency
internal economies of scale
falling average total costs as output increases
sources of internal economies of scale
purchasing economies
marketing economies
technical economies
financial economies
risk-bearing economies
managerial economies
purchasing economies
large firms buying lots of resources get cheaper rates
suppliers offer discounts to firms that buy raw materials and components
bulk buying = better value for money
marketing economies
fixed marketing costs
cheaper to buy assets than outsource
costs spread over more units of output
average cost of advert is smaller for larger firms
technical economies
larger plants are more efficient than smaller ones
more specialisation and investment in machinery
financial economies
larger firms have wider product ranges
sell in a wider variety of markets
reduces risk
external economies of scale
all firms in an industry enjoy falling average costs as the industry grows in a particular region
sources of external economies of scale
skilled labour
infrastructure
ancillary and commercial services
cooperation
skilled labour
build up of labour with skills and experience requiredd by an industry concentrated in one argue
lower training costs during recruitment
vocational courses provided by local institutions for industry
infrastructure
roads, railways, ports, buildings and other facilities suit the need of a particular industry when it’s dominant
ancillary and commercial services
established industries encourage ancillary suppliers to set up and all firms benefit
cooperation
firms in the same industry located close to each other cooperate for gain
diseconomies of scale
average costs rise is a firm continues to expand beyond a certain point as aspects of production become inefficient
sources of diseconomies of scale
bureaucracy
labour relations
control and coordination
bureaucracy
larger businesses rely on bureaucracy
many resources are used in admin if a business becomes too bureaucratic
decision making becomes slow
long communication channels
wasted resources = rising average costs
labour relations
relations between workers and managers deterioriate if a firm becomes too big
management fails to understand workers
workers become demotivated
conflicts occur
control and coordination
large businesses are difficult to control and coordinate
demanding
need for more supervision
raised costs
barriers preventing a business from growing
lack of finance
market nature
lack of managerial skills
lack of motivation
lack of finance
businesses are unable to raise finances need to expand
growth required investment
moneylenders can’t be convinced that the finance borrowed will be repaidd
risky
market nature
some markets are too small to sustain large companies
lack of managerial skills
some owners may not have the managerial and delegate skills required for a large business operation
lack of motivation
some owners may be happy with profit satisficing and have other interests requiring time and flexibility