Economies & Diseconomies of Scale Flashcards

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Questions and Answers

What are economies of scale?

Benefits which occur when a firm increases output and this leads to a reduction in average cost of production.

What are internal economies of scale?

The efficiency of production within a firm.

What is purchasing in terms of economies of scale?

Relates to the firm's purchasing; for example, bulk buying supplies and raw materials.

What is managerial economies of scale?

Relates to the division of labour of firms; firms can employ specialists to supervise production systems and improve management. Signup and view all the answers

What is risk-bearing in the context of economies of scale?

Relates to the firm's likelihood and ability to diversify into other markets. Signup and view all the answers

What is financial economies of scale?

Relates to the firm's finance - larger firms have more credit, allowing them to obtain loans with lower interest rates. Signup and view all the answers

What is marketing economies of scale?

Relates to the firm's marketing techniques; for example advertising and promoting products. Signup and view all the answers

What is technical economies of scale?

Relates to the efficiency of the firm's capital; for example, transportation and machinery. Signup and view all the answers

What are external economies of scale?

External economies of scale refer to the entire industry that a company is in. Signup and view all the answers

What is skilled labour in the context of economies of scale?

Relates to the efficiency of a firm's production; skilled labour can make more products quicker, lowering unit costs. Signup and view all the answers

What is infrastructure in the context of economies of scale?

Relates to the growth of an industry; better infrastructure increases productivity in an efficient and convenient way. Signup and view all the answers

What are ancillary firms in relation to economies of scale?

Relates to the firm's cost of production; firms can receive vital parts cheaply and efficiently if located near similar firms. Signup and view all the answers

What are diseconomies of scale?

Diseconomies of scale occur when a firm increases output and this leads to an increase in average cost of production. Signup and view all the answers

What is bureaucracy in the context of diseconomies of scale?

As a firm grows larger, decision-making processes become more complicated and lengthy, increasing average costs. Signup and view all the answers

What are labour relations in the context of diseconomies of scale?

Poor communication between managers and workers may lead to decreased motivation and productivity among workers. Signup and view all the answers

Study Notes

Economies of Scale

Economies of scale refer to the decrease in average production costs as a firm increases its output.
They lead to enhanced efficiency and cost savings in the production process.

Internal Economies of Scale

Internal economies of scale focus on a firm's operational efficiency.
Various types include:
- Purchasing: Bulk buying of supplies reduces costs.
- Managerial: Hiring specialists improves management and productivity through division of labor.
- Risk-bearing: Larger firms can diversify into new markets, spreading risk across departments and locations.
- Financial: Larger firms have greater access to credit, enabling loans at lower interest rates due to their ability to repay.
- Marketing: Enhanced marketing strategies can be employed due to greater resources for advertising and promotion.
- Technical: Investment in advanced machinery and technology improves operational efficiency.

External Economies of Scale

External economies of scale benefit the entire industry rather than just an individual firm.
Factors contributing to this include:
- Skilled Labour: A skilled workforce increases productivity and reduces costs.
- Infrastructure: Improved road, electricity, and communication systems due to industry growth enhance operational efficiency.
- Ancillary Firms: Proximity to similar firms allows for efficient supply chains and reduced costs for components.

Diseconomies of Scale

Diseconomies of scale occur when increased output results in higher average production costs.
Key issues include:
- Bureaucracy: As firms expand, decision-making can become convoluted, causing delays and increasing costs.
- Labour Relations: Poor communication within large workforces may lead to demotivation, reducing productivity and increasing labor costs.

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Description

This quiz explores the concepts of economies and diseconomies of scale through flashcards. You'll learn definitions, examples, and types of economies of scale, enhancing your understanding of production efficiency in firms.