Economies of scale, diseconomies of scale

Intended to provide information on both internal and external economies of scale and internal and external diseconomies of scale. 

TOCs - Train operating companies 

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  • Created by: Jade
  • Created on: 27-11-12 19:47
What are economies of scale?
Economies of scale are the cost advantages gained through producing on a larger scale
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What are internal economies of scale?
Internal economies of scale - lower long run unit costs are achieved within a firm with higher output. As a firm produces more, so long run average cost fall because of technical, marketing etc factors.
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What are external economies of scale?
External economies of scale are falling long run average costs that benefit all firms in an industry, as a result of their location.
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What are technical economies of scale?
Technical economies of scale are increased physical capacity or a technological development that results in lower long run average costs. E.g. passenger and freight transport through larger vehicles that carry more at a reduced average cost.
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Technical economies of scale example - passenger transport companies cut costs through?
Online advance reservation systems - particularly offered by low-cost airlines, TOCs, ferry service providers as a means of reducing costs. Other forms of booking invariably incur an additional charge.
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Technical economies of scale - train operators can make intensive use of?
Expensive IT systems to manage the deployment of drivers and vehicles.
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What are purchasing economies of scale?
Purchasing economies of scale are reduced unit costs due to bulk buying of inputs into a business, which also allows firms to gain a larger discount.
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How do big firms benefit from purchasing economies of scale?
As firms increase in scale, they increase their purchasing power with suppliers. Through bulk buying, they are able to purchase inputs more cheaply - bulk discounts lower average costs.
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Explain why fuel is an example of purchasing economies?
It is often purchased weeks ahead of being use. By purchasing huge quantities in advance, the large transport operations are able to buy fuel from suppliers at favourable prices.
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Explain why vehicles are an example of purchasing economies?
Firms that run a standard fleet from one supplier often do so because of the bulk discounts available from manufacturers. easyJet, for instance, has a fleet of Boeing 737s purchased in a bulk deal with the American manufacturer.
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What are managerial economies ?
Managerial economies of scale are made by spreading the fixed cost of administration of a large firm across a higher level of output.
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How are large firms able to benefit from managerial economies?
In large firms, these come about as a result of specialisation. In such firms, specialists are employed to act as operational, marketing etc managers. Smaller firms have to rely on multi-task managers.
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What are financial economies of scale?
Financial economies are made by borrowing money at lower rates of interest than smaller firms
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Why are big firms able to benefit from financial economies?
The percieived risk of lending to large-scale operators is lower than for a small new start business.
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What are marketing economies of scale?
Marketing economies of scale are made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.
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What are risk bearing economies of scale?
Risk bearing: by producing an increased range of products, larger firms become less vulnerable to sudden changes in demand or cost conditions.
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What are research and development economies?
They are made by spreading the high cost of developing new and better products over a higher output.
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What are diseconomies of scale?
Diseconomies of scale are causes of an increase in long run average costs beyond the point of the MES
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Explain problems of communication as diseconomies of scale?
In large firm, extra costs may be incurred in making managers aware of what is going on
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Explain problems of coordination as diseconomies of scale?
Large firms invariably have layers of management and several tiers of decision making, which can sometimes hinder change.
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Explain problems of industrial relations?
As firms increase in scale, workers may feel alienated and relationships with the employer may become more strained.
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Decisions are not take quickly and there is too much?
Bureaucracy e.g. form filling
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The disadvantages of ________ take effect.
Division of labour
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Give three examples of external economies of scale
A local skilled labour force is available, specialist local back up firms can supply parts or services. An area has a good transport network.
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External economies of scale arise from a growing ___________ rather than through an individual firm.
A growing local economy and industry
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What is agglomeration?
A term used to describe the process where firms concentrate in specific locations to take advantage of specialised labour and business services.
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What are external diseconomies of scale?
Occur when too many firms have located in one area and long run unit costs begin to rise
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Give examples of diseconomies of scale
Local labour becomes scarce and firms now have to offer higher wages to attract new workers. Land and factories become scarce and rents begin to rise. Local roads become congestion and so transport costs begin to rise.
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Other cards in this set

Card 2

Front

What are internal economies of scale?

Back

Internal economies of scale - lower long run unit costs are achieved within a firm with higher output. As a firm produces more, so long run average cost fall because of technical, marketing etc factors.

Card 3

Front

What are external economies of scale?

Back

Preview of the front of card 3

Card 4

Front

What are technical economies of scale?

Back

Preview of the front of card 4

Card 5

Front

Technical economies of scale example - passenger transport companies cut costs through?

Back

Preview of the front of card 5
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A set of 28 flash cards that cover most of the key points of economies of scale. Students can use them to test themselves and highlight areas for further revision.

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