As firms grow in size, they acquire certain cost advantages resulting in a lowering of the average cost per unit.
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Purchasing economies:
When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk.
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Marketing economies:
The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals.
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Financial economies:
Large firms find it easier to raise finance. Banks treat large firms more favorably and negotiate loans with preferential interest rates. Large companies can issue shares and raise add
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Managerial economies:
A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers.
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Technical economies:
In large scale plants specialist equipment is more available. Large manufacturing firms often use flow production methods.
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Diseconomies of Scale
After enjoying economies of scale a firm starts to experience a rise in average cost per unit due to production inefficineices.
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Give 4 reasons for Diseconomies of Scale
1. Need to expand (i.e. buy more machinery, land etc) 2. Need more workers 3. Poor communication due to hierarchy and general size 4. Need to borrow money to finance expansion
When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk.
Back
Purchasing economies:
Card 3
Front
The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals.
Back
Card 4
Front
Large firms find it easier to raise finance. Banks treat large firms more favorably and negotiate loans with preferential interest rates. Large companies can issue shares and raise add
Back
Card 5
Front
A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers.
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