Economies and Diseconomies of scale 0.0 / 5 ? BusinessInternal economies of scaleA2/A-levelCCEA Created by: Football03Created on: 05-03-22 16:32 Name the 6 types of internal economies of scale? -Marketing -Financial -Commercial/purchasing(bulk-buying) -Managerial -Risk bearing -Technical 1 of 25 What is internal economies of scale? When the firm experiences an increase in the scale of production from inside the firm 2 of 25 What is economies of scale? Savings in costs that can accumulate to the business, associated with proportional levels 3 of 25 What is diseconomies of scale? Can occur due to managerial inefficiencies, which can lead to unit costs increasing 4 of 25 How can internal economies of scale occur? If the firm expands through; increasing product portfolio or opening new stores 5 of 25 How does a reduction in unit costs occur and why would this be beneficial to a business? Through the scale of production increasing.This leads to an increased profit margin. 6 of 25 What is technical economies of scale? The increased use of machinery which allows faster production times 7 of 25 What does mass production allow? -Specialisation -Division of labour 8 of 25 What are two advantage of technical economies of scale? -More up-to-date and effective equipment/technology(e.g tills) -Less staff needed=Lower wage bills 9 of 25 What are two disadvantages of technical economies of scale? -Staff may be demotivated =job insecurity -If technology breaks=production stops-impacting corporate image 10 of 25 What is marketing economies? Large firms are able to spread their marketing costs over a much larger level of output, thereby reducing the average cost of the marketing campaign 11 of 25 Two advantages of marketing economies? -Larger firms can use more effective use of advertisement(TV) -Large firms can employ advertising agencies to design their Ad 12 of 25 Two disadvantages of marketing economies of scale? -Still competing with other large firms (lose advantage) -Think of new way to advertise(TV ignored) 13 of 25 What is financial economies? Large firms can get loans more easily and at lower rates of interest because they're considered more credit worthy 14 of 25 Two advantages of financial economies of scale? -Cheaper interest rate on their loans -Borrow more money 15 of 25 Two disadvantages of financial economies of scale? -Increases a firms gearing (debt) -Loan still has to be repaid(current liability on statement of financial affairs) 16 of 25 What is commercial/purchasing economies? Larger firms get a better deal when it comes to buying raw materials/stock/input(discounts) 17 of 25 Two advantages of bulk buying? -Lower prices =good for customers -Stock won't run out=higher customer satisfaction 18 of 25 Two disadvantages of bulk buying? -Could encourage price wars(loss of profit) -Need storage space /goods may be damaged/pay for insurance 19 of 25 What is managerial economies? Large firms can employ specialist managers/accountants/sales people 20 of 25 Two advantages of managerial economies? -Less mistakes made by managers(smooth running of business) -Managers may stay longer; low labour turnover/career progression 21 of 25 Two disadvantage of managerial economies? -Pay bigger wages for their managers -Manager in larger business can be headhunted(move to competitors) 22 of 25 What is risk bearing economies? Large firms to diversify their output into other market segments or into foreign markets 23 of 25 Two advantages of risk bearing economies of scale? -Diversification spreads the risk (if main product goes into decline, profit can still be made) -May generate a lot of money of risk pays off 24 of 25 Two disadvantages of risk bearing economies of scale? -Shareholders do not like businesses that risk their investment -Risky to expand into new markets; unique culture(Russia/China) 25 of 25
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