Economies & Diseconomies of Scale (Edexcel IGCSE Business): Flashcards
Exam code: 4BS1
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- FrontEconomies of Scale
Define economies of scale.
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Define economies of scale.
Economies of scale are the efficiencies a business gains as it grows, which lower its average (unit) costs of production.
True or False?
Economies of scale lower a business's total costs.
False.
They lower average (unit) costs, not total costs — total costs still rise, but at a decreasing rate per unit.
What is the difference between internal and external economies of scale?
Internal economies lower costs when the business grows; external economies lower costs when the whole market/industry grows.
Define purchasing economies of scale.
Purchasing economies occur when large firms buy in bulk and receive discounts, lowering the average cost per unit.
What are managerial economies of scale?
When large firms can afford specialist, highly skilled managers, whose greater efficiency lowers average costs.
Name two internal economies of scale.
Purchasing economies and managerial economies.
Name two external economies of scale.
A better-skilled workforce and improved infrastructure.
How does a better-skilled workforce create external economies of scale?
A growing industry concentrates skilled workers who need less training and become productive quickly, lowering costs.
Improved transport and communications in a growing industry can make distribution more efficient.
Improved transport and communications infrastructure in a growing industry can make distribution more efficient.
Economies of scale help large firms lower their costs of production beyond what firms can achieve.
Economies of scale help large firms lower their costs of production beyond what small firms can achieve.
True or False?
Bulk-buying raw materials is an example of a purchasing economy of scale.
True.
Buying in greater volume earns bulk discounts, reducing the cost per unit.
What happens to average costs once a firm grows beyond its minimum-cost level of output?
They start to rise again as diseconomies of scale occur.
Define diseconomies of scale.
Diseconomies of scale are the reasons a firm's average costs rise as it grows too large.
What happens to average costs when a firm grows beyond its optimal size?
Average costs start to rise because of diseconomies of scale.
Name three causes of diseconomies of scale.
Poor communication and coordination, increased bureaucracy, and a lack of commitment from employees.
How does poor communication cause diseconomies of scale?
As a firm grows, the chain of command lengthens, so communication becomes slower and mistakes worsen efficiency, raising costs.
How does increased bureaucracy cause diseconomies of scale?
Larger firms are more complicated to run, needing extensive administration, staff and resources that raise average costs.
Why might employees become less committed as a business grows?
They may feel less valued with limited management contact, becoming demotivated, which lowers output and raises average costs.
The point at which a firm can no longer reduce its costs any further is called productive .
The point at which a firm can no longer reduce its costs any further is called productive efficiency.
Many very large businesses break themselves into smaller autonomous to communicate more effectively.
Many very large businesses break themselves into smaller autonomous units to communicate more effectively.
True or False?
Diseconomies of scale mean a business can become so large that it becomes less efficient.
True.
Beyond a certain size, problems such as poor communication make a business less and less efficient.
True or False?
Diseconomies of scale cause average costs to fall.
False.
Diseconomies of scale cause average costs to rise as the firm becomes too large.
How might a business reduce diseconomies of scale?
By reconsidering its organisational structure — e.g. breaking into smaller autonomous units to improve communication.
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