Scale of Operations (AQA A Level Business): Flashcards
Exam code: 7132
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- FrontEconomies of Scale
Define economies of scale.
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Define economies of scale.
Economies of scale are the cost advantages a business gains as it increases its scale of production, causing the average cost per unit to fall.
As a business produces more output, ___ costs can be spread over a larger number of units.
As a business produces more output, fixed costs can be spread over a larger number of units.
How can economies of scale help a larger business compete against smaller rivals?
Lower unit costs allow a larger business to either increase its profit margins or lower its prices to compete more effectively.
Define technical economies.
Technical economies are cost savings that arise from using large-scale machinery, equipment or production techniques that are only efficient or affordable at a high level of output.
True or False?
Expensive automated equipment only reduces unit costs when its cost is spread over a large number of units.
True.
The high cost of the equipment must be spread over a large number of units to cut unit costs. At low output, the equipment would be too expensive or underused.
Define purchasing economies.
Purchasing economies are cost savings a business achieves by buying raw materials or supplies in large quantities, usually at a lower price per unit.
Why are suppliers often willing to offer discounts for large orders?
Large orders reduce the supplier's own costs of processing, packaging and delivering the order.
Purchasing economies are also known as _________ economies.
Purchasing economies are also known as bulk-buying economies.
Which type of cost do purchasing economies reduce?
Purchasing economies reduce a business's variable costs, because each unit of raw materials or supplies costs less.
Define financial economies.
Financial economies are the cost savings a large business achieves when borrowing money or raising finance, compared with a smaller business.
Why can large businesses usually borrow at lower interest rates than smaller ones?
Banks and investors generally see large businesses as lower risk. This is due to their size, assets and established trading history.
Define diseconomies of scale.
Diseconomies of scale are the cost disadvantages a business can experience as it grows too large, causing the average cost per unit to rise rather than fall.
True or False?
A business's long-run average cost curve is U-shaped.
True.
Average costs fall at first as a business grows. Beyond a certain size, it may become less efficient, so its average costs start to rise.
Define control diseconomies.
Control diseconomies occur when it becomes harder for management to monitor and direct the activities of a much larger workforce or number of sites.
Why does growth make it harder for senior managers to maintain standards?
Senior managers can lose direct oversight of day-to-day operations. This makes it harder to ensure consistent standards and spot problems early.
Weaker control can lead to inconsistent quality, missed problems and less ____________.
Weaker control can lead to inconsistent quality, missed problems and less accountability.
Define communication diseconomies.
Communication diseconomies occur when it becomes more difficult to pass information accurately and quickly through a larger, more complex organisation.
Why are messages more likely to be delayed or distorted in a larger organisation?
Messages may need to pass through more layers of management. This increases the risk of delay, misunderstanding or information being lost or distorted.
What problems can poor communication cause in a large business?
Poor communication can lead to mistakes, duplicated work or slow decision-making. This increases costs and reduces efficiency.
Define coordination diseconomies.
Coordination diseconomies occur when it becomes harder to organise and align the activities of different departments, teams or sites so they work effectively together.
True or False?
Coordination problems arise mainly because head office cannot monitor what is happening in every branch.
False.
That describes a control problem. Coordination problems arise because different parts of a business develop their own working practices or priorities, so they stop working towards the same goals.
What can poor coordination result in across a business?
Poor coordination can result in conflicting decisions and inconsistent standards across a business. This increases costs and limits the benefits growth was meant to bring.
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