Chap17

• Economies of scale


  Falling average costs due to expansion
• Diseconomies of scale


  Rising average costs when a firm becomes too big and as result inefficient
• Internal economies of scale

  • Cost benefits that an individual firm can enjoy when it expands
• Internal economies of scale

  • Purchasing economies
  • Marketing economies
  • Financial economies
  • Managerial economies
  • Technical economies
  • Risk-Bearing economies
• Purchasing economies


  Discounts on bulk purchases
• Marketing economies


  • Larger businesses can afford to purchase their own vehicles to distribute goods
  • Advertising costs (fixed cost) can be spread over more units when larger firm
  • The amount of sales staff will not increase in the same proportion as the number of product lines
• Technical economies


  • Larger firms can now afford to buy specialised and latest equipment which makes them more efficient
• Financial economies


  • Easier for larger businesses to borrow money from banks with lower interest rates
  • Larger firms have wider variety of sources to choose from i.e. limited companies -> sell shares – not available for sole traders
• Managerial economies


  • Larger businesses can now afford specialist managers in all departments, increasing efficiency
• Risk-Bearing economies


  • Larger firms have wider product ranges and sell into a variety of markets which reduces the risk
• External economies of scale

  Cost benefits that all firms in an industry can enjoy when the industry expands
• Skilled labour


  • When industry concentrated on an area -> build-up of labour with the skills and work experience required -> less training costs
  • Schools/colleges will provide vocational courses required
• Infrastructure


  • When an industry dominates a region, roads, ports, railways will be shaped to suit industry' s needs
• Access to suppliers


  • Suppliers encouraged to set up close by i.e. banks, waste disposal, distribution, component suppliers – this means all firms in the industry will benefit from their services
• Similar businesses in the area

  • Similar firms located close to each other are likely to cooperate and all benefit from each other i.e. work together to share cost and benefits of a research and development centre
• Diseconomies of scale


  • Bureaucracy
  • Communication problems
  • Lack of control
  • Distance between senior staff and shop floor workers
• Bureaucracy


  When a business becomes too large – > too many resources are used in administration (bureaucratic) -> too much time spent on filling in forms/ reports -> decision making gets too slow and communication too long
• Communication problems


  Too many employees all over the world – different languages and cultures, time differences -> communication more difficult
• Lack of control


  Difficult to control and coordinate a large firm - -more supervision and more layers of management needed which raise costs
• Distance between senior staff and shop floor workers

  • Too many layers of management –> senior managers might be so far removed from those at the bottom of the organisation – not aware of their needs
  • Lack of understanding – workers become demotivated
  • Conflicts may occur and resources may be wasted resolving them