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?
- number of employees
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.