Economies and diseconomies of scale.ppt archonomics.ppt

economiesanddiseconomiesofscale,lessonobjectives:studentstolearnhowtoapplytheconceptsofeconomiesanddiseconomiesofscale.,economiesofscale,economiesofscaleleadtoreductionsinunitcostsasthescaleofoperationincrease.,averagecosts,scaleofoperation,whatismeantbyanincreasescaleofoperation,thisreferstoanyincreaseinthecapacityofabusiness.itcouldbeachievedby:buyingnewmachinerybuildingabiggerfactory/shop/plane/shipmerger,howdounitoraveragecostsfallasthescaleofproductionincreases?1,technicaleconomiesusinglargescaleproductiveequipment.whilstthisequipmentisexpensivethelargeoutputleadstoreducedunitcosts.toacquiresuchequipmentrequiresthatthebusinesshasthefinanceandthedemand.marketingeconomiessellinginbulkreducesadmin/transportcosts.alsolargescalesellingcanbesupportedwithamarketingbudgetthatdoesnotneedtoincreasewiththesalesrevenuegenerated.egatelevisionadvertcosting$1mcansupport$4msalesadayor$8msalesaday.financialeconomieslargerbusinessesaresimplylesslikelytogobankruptandtheyhavesizableassetstheycanuseascollateral.theycannegotiatetheinteresttheypayonloansandevenissuetheirowndebt(commercialbonds).,howdounitoraveragecostsfallasthescaleofproductionincreases?2,managerialeconomiesasbusinessesexpandtheyemployspecialistmanagers.thebosswithaeyeoneachbusinessfunctionbecomesdepartmentsstaffedbyspecialists.whilstthisincreasesthemanagerialsalarybillthesemanagersareexperts.humanresourcemanagersnowrecruitbettersuitedcandidateswhofitwiththeorganisationsneedsandculture.employeesstaylonger,aremoremotivatedandmoreproductive.productionmanagerscanre-arrangeproductionsothatitismoreefficientandtheyhavebetterknowledgeregardingwhatequipmenttopurchase.purchasingeconomiesbulkbuyingdiscounts,externaleconomies,theseoccurwhenanindustrydevelopsinacertainarea:pooloftrainedworkersancillaryservicesmarketing,accountancytocleaningco-operationbetweenbusinessesegonresearchanddevelopmentdevelopmentofspecialistsuppliersofcomponentsandrawmaterials,limits?,therearelikelytobelimitstoeconomiesofscale.howlargecanmachineryget?howlargecanmarketsget?howlargecanaplaneget!?yougettheidea?,diseconomiesofscale,businesscanbecometoolarge.unitcostscanthentendtorise.causes:communicationhierarchicalstructure,informationoverload,formalmethods,lessfacetoface,language.co-ordinationdifferentdepartmentsmustworktowardssamegoals.motivationbeingasmallfishinabigpondsyndrome.lesscontactwithseniormanagers.technicaldiseconomiesifalargemachinebreaksdownproductioncostscanrise.,dodiseconomiesexist?,evidencesuggeststhatunitcostsmaynotriseasthescaleofproductionincreasesbeyondanoptimumscale.task!diseconomiescanbeaddressed.considerhoweachcanbeovercomewithinamulti-nationalbusiness.,whydobusinessesgrow?,exploiteconomiesofscaleincreaseprofitsincreasemarketshare/salesobtainmonopolypowerbethemarketleaderonpricediversifythusreducerisk,task!question2,page588andquestion3b,page589(3x5marks),whydosmallfirmssurvive?whydotheystaysmall?,reasons,lackofeconomiesofscale.(except,perhaps,bulkbuyingdiscounts).nichemarkets/sizeofthemarket(egcouldbealocalmarket)objectivesofthebusinessalso.nichemarketsmaynotbeworthenteringforlargerbusinesses.,largeorsmall?,drawupalistofadvantagesanddisadvantagesofbeinga:largebusinesssmallbusinesswhichisbestsuitedto: