Economies Of Scale

• What is the definition of economies of scale?

  Falling average costs from increased firm size
• What happens to a firm beyond a certain size?

  It may suffer from diseconomies of scale
• What are internal economies of scale?

  Economies arising from increased output of the business
• What are the types of internal economies of scale?

  • Technical Economies
  • Purchasing Economies
  • Marketing Economies
  • Financial Economies
  • Managerial Economies
• What are technical economies of scale?

  Large producers use techniques unavailable to small producers
• How can large firms reduce unit costs?

  By employing mass production techniques
• What advantage do large businesses have in purchasing economies?

  They can bulk buy goods at lower unit prices
• What is a benefit of large businesses in marketing economies?

  Advertising costs can be spread across many stores
• How do financial economies benefit large firms?

  They find it easier to raise capital and secure loans
• What is a managerial economy of scale?

  Specialized management leads to higher productivity
• What are external economies of scale?

  Advantages gained for the whole industry
• What geographical factors contribute to external economies of scale?

  Location, skilled labor, transport, reputation
• How does a skilled labor pool benefit businesses in an area?

  It provides specialized skills for growth
• What happens to transport links as businesses grow in an area?

  Better road and transport links develop
• What is a limitation of economies of scale?

  Limited total market demand for many products
• How does falling demand in a recession affect businesses?

  It leads to under-utilized capital and rising costs
• What is a niche market's advantage for smaller producers?

  They can supply at higher costs due to demand
• What is the principal-agent problem in large firms?

  Loss of management focus on core objectives
• What are some issues caused by diseconomies of scale?

  Communication difficulties and low productivity
• How does corporate bureaucracy affect large firms?

  It slows down decision-making and lowers productivity
• What is the minimum efficient scale (MES)?

  Output where internal economies are fully exploited
• What does the MES correspond to on a cost curve?

  The lowest point on the long-run average cost curve
• How do average cost curves behave as a firm grows?

  They gradually decrease over time
• What is the significance of the lowest point on the average cost curve?

  It indicates the minimum efficient scale of production