GCSE Business Studies/Economies and Diseconomies of Scale

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Business Size[edit]

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[edit]

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.

Internal Economies[edit]

Production and Technical Economies[edit]

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[edit]

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.

Financial Economies[edit]

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[edit]

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.