GCSE Business Studies/Economies and Diseconomies of Scale
There are a number of indicators used to determine whether a business is large or small. Some of these are:
- Number of employees: How many people are employed by the business?
- Turnover: What is the sales revenue of the business?
- Value of its assets: How much are all the possessions of the company worth?
- Physical size of the business: How many shops or warehouses does it own? How much land does it occupy?
Economies of Scale
Large businesses have some advantages over smaller businesses. These are known as economies of scale, and can be divided into two categories:
- Internal economies of scale: Are related only to the business itself.
- External economies of scale: Benefit the whole industry or community.
Production and Technical Economies
These economies relate to the firm's production process. Some examples of these are:
- Mass production means lower unit costs.
- Able to transport materials in bulk, saving on transport costs.
- Can use computers and technology that may be too expensive for a small firm.
Purchasing and Marketing Economies
These economies relate to the firm's purchasing and marketing. Some examples of these are:
- Bulk buying means raw materials are cheaper.
- Advertising costs can be spread.
These economies relate to the firm's finance. Some examples of these are:
- Easier to raise capital - better lending terms and lower interest rates.
- Risk is spread over multiple products.
External economies are those that benefit the whole industry or community. Some of these are:
- Better road and rail networks improve the area the business is in.
- Skilled labour in the area increases.
- Other businesses, such as suppliers, are attracted to the area.
- This provides a mutual advantages to businesses in the area.