| What is Economics of Scale? | -This relates to the idea that the AC for a Firm will Lower as more Product is being Produced, in the Long Run.
-The Cost Advantage of Production on a Larger Scale |
| What are the 2 Types of Economics of Scale? | -Internal
-External |
| What is Technical Economies of Scale | -An Internal Economies of Scale
-Uses Production Line Methods to make Lots of Things at Low Cost
-Purchase Specialised Equipment (robots) to Lower AC
-Specialise for Workers - Increased Efficiency
-Law of Increased Dimensions: Price you pay for a new Warehouse is related to Cost of Area of Walls and Roof. If the Dimensions of Walls and Roof doubled, the Area is 4x Greater - Cost 4x Greater. But the Volume is 8x Greater, so you get More Storage for your Money.
-ALL of this assumes the Firm is Large |
| What is Purchasing Economies of Scale? | -An Internal Economies of Scale
-Large firms producing Lots of Goods needs Lots of Raw Materials, thus, it can Negotiate with their Suppliers for Discounts
-Why? Because Large Firms are the Most Important for Suppliers as they bring the Big Orders and thus have a Large Influence on Revenues for the Suppliers |
| What is Managerial Economies of Scale? | -An Internal Economies of Scale
-Large Firms can employ Specialist Mangers that tackles different Caters of the Firm. Expertise and Experience is gathered, leading to better Decision Making
-Manger Numbers aren't dependent on the Production Scale. If Production Doubled, Manger Numbers probably won't Double. So AC of Mangers fall. |
| What is Financial Economies of Scale? | -An Internal Economies of Scale
-Big Firms can borrow Money at Lower Interest Rates, due to being quite Stable |
| What is Risk-bearing Economies of Scale? | -An Internal Economies of Scale
-Big Firms go into different Product areas and Different Markets which can create a Predictable Overall Demand (If Demand for a Product falls in Pakistan, there may be a Different Product in Uganda getting Attention)
-Large Firms can take more Risks as its other Activities (products) absorbs the Cost of Failure better |
| What is Marketing Economies of Scale? | -Advertising is usually Fixed Cost - Spreads across more Units for Big Firms so AC falls
-Firms can also Advertise several Products at the same time, so the Cost per Product to Advertise falls
-Big Firms enjoy Brand Awareness - Trusted by Consumers. This means Advertising isn't as Essential. |
| What does External Economies of Scale Entail? | -Colleges offer Qualifications that Big Employers need, Training costs can fall
-Big Firms in an Area can Improve the Road Network or Public Transport
-If Firms are doing Related or Similar things, and are near each other, then Resources can be Shared. Suppliers may also move Closer as a result |
| Why can Economies of Scale lead to Monopoly Power? | -When the Firm's AC falls, it can set a Lower Price. This undercuts their Opponents
-The Firm thus gets a Bigger market Share as it Offers Products at Prices lower than their Competitors
-Eventually, the Firm can Force all other Rivals out and become the only Supplier of the Product. Monopoly |
| What is Internal Diseconomies of Scale? | -Waste and Loss can go Up, even if Raw Materials are in Plentiful. Big Warehouses can create Confusion
-Communication becomes Harder as the Firm Grows.
-Managers can be able to Control less
-Activities can become Hard to Coordinate which leads to Failure and Incidents
-'Them and Us' Mindset in Workers of Different parts in a Big Firm. Workers puts their Department Interests First, before the Firms, which Lowers Efficiency and Cooperation. |
| What is External Diseconomies of Scale? | -As the Industry Expands, the Price of Raw Materials goes Up as Demand Increases
-Buying Lots of Materials may not make them Less Expensive Per Unit. If Local Suppliers won't do, then it may have to be Bought Further Away, and perhaps more Expensive |
| Why can High Fixed Costs influence Economies of Scale? | -Economies of Scale can be Huge if there are High Fixed Costs and Low Variable Costs.
-Robot Based Assembly Lines are Expensive to Set up, but Reduces the Labour needed to Produce each Unit. Fixed Costs Rise (Loans to buy the Equipment) Variable Costs fall (Less Labour)
-As the Firm grows from using the Large Economies of Scale, other Firms may just have to dot he Same, or Quit. This leads to only a Few Firms Dominating |
