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Economies of scale: ways in which long run increases in output and capacity can reduce costs per unit of output and increase efficiency.
These can be either INTERNAL or EXTERNAL.
Internal economies: are long run reductions in costs per unit resulting from expansion of a single business.
Technical economies: when larger and more efficient capital items can be used because their high costs can be spread across a larger
quantity of output.
Marketing economies: occur when high cost advertising and promotion activities are feasible. The costs are covered if they can secure
high and rising sails.
Managerial economies: become possible when output is high enough to justify hiring specialists to perform specific management
tasks e.g. for marketing and HRM.
Financial economies: are possible when lenders offer big businesses lower interest rates because they look less risky.
Bulk-buying economies: occur when businesses are purchasing large enough quantities to be charged a lower price per unit, either
because unit supplier costs are reduced or because the buyer has market power.
Risk bearing economies: when a business has a single product or a single market, it is highly vulnerable if that product fails.
(Businesses with many products can spread the risk by offsetting losses in one area against profits elsewhere.)
External economies: the reductions in unit costs that occur as long run output rises and are shared by a whole industry rather than limited
to a single firm. These are very common when similar firms are concentrated in one location.
Diseconomies of Scale
Increases in unit cost that occurs as a business grows larger.
This is mainly due to communication difficulties; it grows harder to share information effectively, contacts inevitably become less
personal and there is an increasing chance of conflicting decisions in different departments.
Minimum efficient scale: the lowest level of output at which average or unit costs can be minimised.
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Organic growth: expansion of a single business by extending its own operations rather than be merger or takeover activity. Slower but
more secure. E.g. Sainsbury's & Coca-Cola
Inorganic growth: refers to expansion by merger or takeover, bringing sudden increases in business size. E.g. bank of Scotland took over
Monopsony: means literally a single buyer. Buyers with monopsony power have some control over their suppliers and can force them to
reduce prices or lose their contacts.…read more