Economies & Diseconomies of Scale Flashcards
All 12 cards in this deck
What are economies of scale?
The fall in average (unit) costs that happens as a business increases its output.
What are purchasing economies of scale?
Buying materials or stock in bulk, so the supplier charges a lower price per unit.
What are technical economies of scale?
Using large-scale or specialist machinery, so the cost of producing each unit falls.
True or false? Economies of scale mean that a business's total costs fall as it produces more.
False. Average (unit) costs fall; total costs normally still rise as output increases.
What are the steps to calculate average unit cost?
e.g. total costs of £800 to produce 200 units- Find total costs: £800
- Divide by output: 800 ÷ 200
- Average unit cost = £4 per unit
A business's average unit cost rises as its output grows. What does this show?
Diseconomies of scale are occurring — the business has grown beyond its most efficient size.
What are diseconomies of scale?
The rise in average (unit) costs that happens when a business grows too large.
How does poor communication cause diseconomies of scale?
With more staff and sites, messages are slower and misunderstood, so mistakes push unit costs up.
How do coordination issues cause diseconomies of scale?
A larger business is harder to organise and control, so work is duplicated and unit costs rise.
How does reduced staff motivation cause diseconomies of scale?
Employees feel less valued in a large business, so productivity falls and unit costs rise.
True or false? If expansion would lower a business's unit costs, it should always go ahead.
False. The extra sales revenue must also cover the extra costs, and cash flow and the risk of diseconomies must be considered.
True or false? As a business keeps growing, it can first gain economies of scale and later suffer diseconomies of scale.
True. Unit costs fall as output rises at first, but beyond a certain size problems such as poor communication push unit costs back up.