economies of scale

• What is the definition of economies of scale?

  Reduction in average costs as production increases
• How do economies of scale provide a competitive advantage?

  They lower average costs for larger businesses
• What happens to total costs as output increases?

  Total costs increase while average costs fall
• What distinguishes short run costs from long run costs?

  Short run has fixed and variable costs; long run has only variable costs
• What is an example of a fixed cost in the short run?

  Rent under a 12-month contract
• How does a business's long run average cost curve relate to short run average cost curves?

  It consists of multiple short run average cost curves
• What is an example of how long run economies of scale can further reduce costs?

  Using a digger instead of manual labor
• What are the two broad groups of economies of scale?

  • Internal economies of scale
  • External economies of scale
• What are purchasing economies of scale?

  Cost reductions from larger orders of materials
• How do technical economies of scale improve efficiency?

  By allowing purchase of advanced equipment
• What are financial economies of scale?

  Access to better borrowing rates due to asset growth
• How do managerial economies of scale enhance efficiency?

  By employing specialized managers for better value
• What are marketing economies of scale?

  Lower advertising costs per store as business grows
• What are external economies of scale?

  Benefits that affect an entire industry, not just one business
• How do supplier economies of scale benefit businesses?

  By attracting suppliers to reduce costs
• What are educational economies of scale?

  Training schemes tailored to industry needs
• How do financial economies of scale manifest in an industry?

  Improved financial services tailored to industry needs
• What are diseconomies of scale?

  Higher costs per unit as organization size increases
• What can cause diseconomies of scale in a building site example?

  Foreman unable to supervise too many workers
• What are internal diseconomies of scale?

  Factors causing inefficiency within a large organization
• How do coordination issues affect large organizations?

  They complicate decision-making and direction
• What communication issues arise in larger organizations?

  Increased misunderstanding and distorted messages
• How do motivation issues manifest in large businesses?

  Workers feel ignored and less engaged
• What are external diseconomies of scale?

  Factors causing inefficiency outside the organization
• How does overcrowding in industrial areas affect businesses?

  Traffic congestion leads to late deliveries
• What happens to resource prices as more businesses enter an area?

  Resource prices increase due to higher demand
• How do economies of scale affect stakeholders?

  • Consumers benefit from lower prices
  • Shareholders gain from increased share values
  • Suppliers face pressure to lower prices
• Why are small businesses less efficient compared to larger competitors?

  They cannot benefit significantly from economies of scale
• What factors contribute to the survival of small businesses?

  • Service difficult to scale up
  • Flexibility to adapt to demand
  • Target market size suited to small businesses
  • Quality of service justifying higher prices
  • Customer loyalty to local providers
  • Niche markets too small for large businesses
• What is the significance of target market size for small businesses?

  It can suit specific services like grooming
• How does population density affect large businesses?

  Large businesses need large target markets
• Why might small businesses charge higher prices?

  Due to added value in service and product quality
• What role does customer loyalty play in small business survival?

  It helps maintain a steady customer base
• What are niche markets in relation to small businesses?

  Segments too small for larger businesses to target
• Technical Economies of Scale

  A type of internal economies of scale resulting from specialized equipment, division of labor, and expertise.
• Internal Economies of Scope

  A type of internal economies of scale resulting from shared resources, facilities, and administrative services.
• Economies of Experience


  A type of internal economies of scale resulting from improved production processes and techniques over time.
• Pyschological Economies of Scale

  A type of internal economies of scale resulting from improved employee motivation and morale due to being part of a large organization.
• Managerial Economies of Scale

  A type of internal economies of scale resulting from centralized decision-making and standardized procedures.
• External Economies of Scale Benefits

  Reduced prices, increased quality, greater efficiency, and innovation.