economies of scale? (1 Viewer)

[eagleeye tommo]

don't understand these at all can anyone explain the 2 me?

 

[iRuler]

hmm had my eco exam this morning... and There was a question like that worth 4 marks... hmm.. I should know this, but i've forgotten pretty much all of eco i learned after the exam lol

well

I've learnt about Internal economics of scale:

- Businesses are able to reduce unit costs of production as out increases.
-Economies of scale reflects the advantages for a firm, which are experienced by the firms, as the firm grows and increases production.

These cost savings are caused by:-
a) As a firm becomes larger, it can take advantage of the specialisation of labour.
b) A large firm can invest more in efficient capital equipment.
c) Large firms can buy raw materials in bulk (leading to a percentage discount, and cheaper delivery costs)
d) Large firms often find it easier to raise finance for expansion.

- However a firm cannot continue to grow indefinitely. It will eventually reach a point where the cost of production will start to rise because there are certain disadvantages of going too big.

- These disadvantages are known as internal diseconomies of scale and are generally releated to management problems.

The Disadvantages include:-
a) Management loosing touch with the day-to-day management of the firm.
b) Management not knowing staff personally may lead to disputes between management and staff.

The relationship between production costs and internal economies and diseconomies of scale: (check attachment, source: Wikipedia (only for the image))

Also hope I helped , if anyone has any improvements to make, or correct me, please do so

 

[mrcalkin]

Economies of Scale is the advantage a firm gains when it grows in size, and lowering per unit cost.

E.g When When Henry Ford set up the production line, people were excieted on what colours the car's could be, then in a interview he said " they can have any colour as long as its black" This was because he would only have to buy black paint in huge qty, saving him more money per car.

Another example is a business opens a new store, it can save more per piece, if it orders products for 2 stores together, saving more money, by getting bulk discounts.

 

[chewy123]

Basically when you buy things in bulks, it's becomes cheaper. Likewise in an economy - if you produce a lot, cost for each unit becomes cheaper....there are reasons from iRuler's post.

 

[eagleeye tommo]

thanks guys so internal economies of scale are just the advantages gained for the expansion of a firm? and diseconomies is when it gets above the technical optimum and it begins to cost more?

and i suspect external econmomies and diseconmoies of scale ar just outside factors that affect cost per unit?

 

[joshau-k]

Your'e close. External [dis]economies are within that industry, affecting all the firms in it.

 

[mugamacranbrook]

Your'e close. External [dis]economies are within that industry, affecting all the firms in it.

you're close. external economies and diseconomies of scale can come from any outside factor in the economy. for example, if the government puts a tax on your products (cigarettes, alcopops or whatever), that is an external diseconomy of scale, and an ext. economy of scale could be a government incentive. they can come from any section of the economy.

 

[tehrobzorz]

external - firms have no control
internal - firms control