9609 · 9.1.2
Scale of operations flashcards
Revision flashcards for Cambridge 9609 Scale of operations (syllabus 9.1.2). Flip, recall, then mark a real past-paper question.
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Economies of scale?
Unit cost falls as output increases — internal vs external.
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Technical economy example?
Containerisation, flow production, specialist machinery.
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Financial economy?
Lower interest rates — banks trust large firms more.
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Marketing economy?
National ad campaign cost spread over millions of units.
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Diseconomy example?
Slow decisions, duplicated roles, alienated workforce.
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Minimum efficient scale?
Smallest output where unit cost is minimised.
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Link to 4.1.4?
Flow production achieves scale; job production does not.
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Link to strategy?
Cost leadership needs scale; niche strategy may avoid diseconomies.
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What is the 'Minimum Efficient Scale' (MES)?
The lowest level of output at which a firm can minimise its long-run average costs. It is the point of optimal productive efficiency, found at the bottom of the U-shaped LRAC curve.
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Differentiate between internal and external economies of scale.
Internal economies of scale result from the growth of an individual firm (e.g., bulk-buying). External economies of scale result from the growth of the entire industry or region, benefiting all firms (e.g., a local skilled labour pool).
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What are the three main causes of diseconomies of scale?
1. Communication problems due to complex hierarchies. 2. Coordination and control difficulties across a large organisation. 3. Poor employee morale and motivation, often termed alienation.
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How do financial economies of scale arise?
Larger, established firms are perceived as less risky by banks and lenders. They can therefore access loans at lower interest rates and have a wider range of financial options available to them compared to smaller firms.
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Explain 'managerial economies of scale'.
This occurs when large firms can afford to hire specialist managers for different functions (e.g., finance, marketing, HR). This expertise leads to more efficient decision-making and operations, lowering average costs.
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What is the relationship between the LRAC curve and SRAC curves?
The Long-Run Average Cost (LRAC) curve is an 'envelope' curve, tangent to a series of Short-Run Average Cost (SRAC) curves. Each SRAC represents a fixed plant size, and the LRAC shows the lowest possible average cost for any given output level when the firm can change its plant size.
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How can a firm mitigate diseconomies of scale?
Through decentralisation (giving more autonomy to divisions), delayering (reducing management levels to improve communication), and using technology (e.g., video conferencing, project management software) to improve coordination and communication.