ECONOMIES & DISECONOMIES

• What are economies of scale?

  falling average costs of producing something in very large quantities
• What are dis-economies of scale?

  the rising average cost when a firm becomes too big
• BUYING MORE OF SOMETHING = CHEAPER COST PER UNIT
• What are internal economies of scale?

  cost benefits that an individual firm can enjoy when it expands
• What are some sources of internal economies of scale?

  • purchasing economies
  • marketing economies
  • technical economies
  • financial economies
  • risk-bearing economies
  • managerial economies
• What is purchasing economies?


  large firms buying in bulk to get cheaper rates
• What are marketing economies?

  costs that can be spread across more outputs, making the average cost of advertising smaller for a large firm
• What is technical economies?

  an occurrence that happens because large firms are more efficient than small firms. They can have more specialisation and investment in machinery.
• What is an example of technical economies?

  A small firm may buy some computer aided design (CAD) software for $1000 but only use it one day a week whereas a much larger firm may use it every day. Meaning the larger firm is making better use of it and its average cost will fall.
• What are financial economies?

  Large firms can get cheaper money and have a wide variety of sources to choose from. e.g. a large firm can raise money by selling shares. Sole traders cannot do this.
• What are managerial economies?

  a small firm may employ a general manager to be responsible for all departments, making them weak in some areas of the job whereas a larger firm can afford specialists, meaning efficiency is likely to improve and average costs fall.
• What are risk-bearing economies?

  wider product ranges to sell into a wider variety of markets, reducing risk in a business
• What are external economies of scale?

  cost benefits that all firms in the industry can enjoy when the industry expands. It is more likely to occur if an industry is concentrated in a particular region
• What are examples of external economies of scale?

  • skilled labour
  • infrastructure
  • ancillary and commercial services
  • cooperation
  • bureaucracy
  • labour relations
  • control and coordination
• What is skilled labour?

  build-up of labour concentrated in one area with skills and work experience required, resulting in training costs lowered
• What is infrastructure?

  roads, railways, ports, buildings, and other facilities shaped to suit the dominating industries needs
• What are ancillary and commercial services?

  the encouragement of ancillary suppliers in the industry to set up close by, benefiting all firms on the industry
• What is ancillary?

  services connected with something but are less important that the main part of it. such as ambulance services
• What is cooperation?

  When firms in the same industry cooperate together due to being located close, so they can all gain
• What is bureaucracy?

  when too much time is spent filing forms or writing reports, or decision making is too slow and communication channels are too long. Leading to average costs rising
• What is labour relations?

  loss of manager and worker relations because a firm becomes too big. Leading to not only poor communication and de-motivation but also resources are wasted when fixing conflicts
• What is control and coordination?

  raised costs because of the need for supervision in a large business to help control and coordinate thousands of employees
• What are some other limits to growth?

  • lack of finance
  • nature of the market
  • lack of managerial skills
  • lack of motivation