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Costs of production
Business
| Question | Answer |
|---|---|
| Scale of Production – Economies and Diseconomies of Scale | The size of an individual firm has an important influence on the operating efficiency of that firm= |
| Scale of Production – Economies and Diseconomies of Scale | The economies and diseconomies experienced by an individual firm as it grows are called the internal economies and diseconomies of scale= |
| Internal Economies of Scale | 1. Specialisation of labour: as a firm grows in size, each worker will be able to specialise in one particular task instead of dividing his time between a number of different jobs= |
| Internal Economies of Scale | 2. Use of the machinery: with large scale production and increased specialisation of labour it is possible for a firm to use machinery more economically= |
| Internal Economies of Scale | 3. Marketing economies: as a firm grows it will purchase and sell stock in larger quantities. Bulk purchasing may result in larger discounts from suppliers= |
| Internal Economies of Scale | Continuity of the production process: a large firm will find it easier to arrange production into one continuous process from the initial stages to the final output= |
| Internal Economies of Scale | 5. Large offices and factories cost less per cubic foot to erect than smaller ones. This is due to the fact that there are certain fixed costs in the initial stages= |
| Internal Economies of Scale | 6. The bulk purchase: of building materials may result in substantial discounts= |
| Internal Diseconomies of scale | 1. Decision-making: as a firm grows in size, the lines of authority and chains of responsibility become less clearly defined= |
| Internal Diseconomies of scale | 2. Staff morale: as a firm grows and the workers within it become more specialised, their morale suffers due to the monotonous and repetitive nature of the specialised tasks they are performing= |
| Internal Diseconomies of scale | 3. Communication problems: as a firm grows in size, communication becomes more difficult due to greater numbers of employees and more complex lines of authority= |
| Internal Diseconomies of scale | 4. Administration overheads: as a firm expands, its administration costs will usually increase at a faster rate than its output= |
| External Economies of scale | 1. Disintegration: when an industry becomes large enough, one process may be isolated and performed on a large scale by a specialist firm= |
| External Economies of scale | 2. Subsidary trades: as an industry grows, subsidary trades will develop locally to service the expanding industry. The growth of subsidary trades benefits all the firms within a particular industry= |
| External Economies of scale | 3. Specialised services: when an industry becomes very large, research and development agencies may be set up to provide facilities for the individual firms within the industry= |
| External diseconomies of scale (disadvantages) | 1. Shortages of factors of production: (a) As an industry expands, scarcities of factors of production, particularly skilled labour, leads to increased labour costs or the employment of less suitable workers= |
| External diseconomies of scale (disadvantages) | 2. Raw material shortage: pressure will be put on the supply of raw materials with increased demand and a possible shortage may arise= |
| External diseconomies of scale (disadvantages) | 3. Infrastructural problems: as an industry expands, its demand for infrastructure= |
Created by:
athlonebusinessstudies
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