1.5 economies of scale

Measuring business size

Market share

Total revenue

Size of workforce

Capital employed

Profit

Size is what

Relative

Benefits of being large

Brand recognition

Large market share

Greater choices for customer to increase customer loyalty

Economies of scale

Spread risk by diversifying into new markets

Benefits of being small

Cost control

minimize financial risk

Grants and subsidies

Local monopoly power

Personalized services

Flexible and quick to adapt changes

Avoid being taken over

Economies of scale

When average cost of production begins to fall as the firm operates on a larger scale due to an improvement in productive efficiency

Minimum efficient scale

Optimal level of output where average cost are lowest

Internal economies of scale

Reduction in average costs of production due to a conviction of factors that occur within an organization

External economies of scale

Reduction in average cost of production due to a combination of factors that occur outside an organization

Internal economies of scale types

Financial marketing managerial, technical purchasing risk bearing specialization

Financial economies

Banks and other lenders charge lower interest to larger businesses because they represent low risk

Marketing economies

Larger businesses can spread their cost of marketing by promoting and advertising a greater range of friends and products

Managerial economies

Larger businesses can afford to hire specialist functional managers, does improving the organizations, efficiency, and productivity

Technical economies

Cost saving by greater use of large scale, mechanical processes, and specialist machinery

Purchasing economies

Larger firms can gain huge cost savings by buying vast quantities of stocks

Risk bearing economies

Large businesses can bear greater risk than smaller use to a greater product portfolio

Specialization economies

Larger firms can afford to hire and train specialist Workers helping to boost output, productivity, and efficiency.

External economies of scale factors

Technological progress

Improved transportation network

Abundance of skilled labor

Regional specialization

Diseconomies of scale definition

When average cost begin to rise as a firm continues to increase in size

Internal diseconomies of scale

Increased bureaucracy, lack control and coordination, poor working relationship, too much specialization and division of labor

External diseconomies of scale

Increasing market rents traffic, congestion competitors may offer high wages and financial rewards to attract new staff

Synergy

a benefit of growth, which occurs when the whole is greater than the sum of the individual parts when two or more business operations are combined.

Synergy creates greater output and improved efficiency.