Economies and diseconomies of scale in production
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Question
What are diseconomies of scale?
Answer
When a business gets TOO big and average costs start RISING — bigger isn't always better.
💡 Hint
Too big → costs rise
Question
Economies = average cost ___ as output ___
Answer
Falls; increases.
💡 Hint
Falls + increases
Question
Every business has an ___ size where average costs are lowest
Answer
Optimal — below it, economies of scale apply; above it, diseconomies kick in.
💡 Hint
Optimal
Question
What are purchasing economies?
Answer
Bulk buying discounts from suppliers — buy more, pay less per unit.
💡 Hint
Bulk = cheaper
Question
What are economies of scale?
Answer
When a business grows bigger and its average cost per unit FALLS — more output = cheaper per unit.
💡 Hint
Bigger → cheaper per unit
Question
What are technical economies?
Answer
Using large-scale machinery and technology more efficiently — big machines produce more at lower cost per unit.
💡 Hint
Big machines = efficient
Question
Why do average costs fall with scale?
Answer
Fixed costs spread over more units, plus bulk buying discounts and specialist equipment becomes worthwhile.
💡 Hint
Spread FC + bulk + specialise
Question
Name three causes of diseconomies of scale
Answer
Communication problems, coordination difficulties, motivation drops, slow decision-making, waste/inefficiency.
💡 Hint
Communication + coordination + motivation
Question
Growth brings economies BUT may also lead to ___
Answer
Diseconomies if the business grows too fast or too big — argue both sides in 10-mark questions.
💡 Hint
Diseconomies
Question
Types: purchasing, technical, financial, ___, ___
Answer
Managerial, marketing.
💡 Hint
M + M
Question
What is the exam definition of economies of scale?
Answer
The reduction in average cost per unit as a business increases its scale of production.
💡 Hint
Average cost falls with scale
Question
Small → growing → ___ → too large → ___
Answer
Enjoys economies (costs fall) → diseconomies kick in (costs rise).
💡 Hint
Economies → diseconomies
Question
Why does motivation drop in very large businesses?
Answer
Workers feel like a small cog in a big machine — less personal connection to the company.
💡 Hint
Small cog, big machine
Question
What are financial economies?
Answer
Banks offer lower interest rates to larger, safer businesses — cheaper borrowing.
💡 Hint
Bigger = cheaper loans
Question
Diseconomies caused by: communication, coordination, ___
Answer
Motivation problems — workers feel disconnected in huge organisations.
💡 Hint
Motivation
Question
What are managerial economies?
Answer
Hiring specialist managers for different departments — experts increase efficiency.
💡 Hint
Specialists = efficient
Question
Businesses aim for the ___ size where costs are ___
Answer
Optimal size; lowest.
💡 Hint
Optimal + lowest
Question
Name two types of economies of scale
Answer
Purchasing (bulk discounts), Technical (efficient machinery), Financial (cheaper borrowing), Managerial (specialists), Marketing (spread ad costs).
💡 Hint
P-T-F-M-M
Question
Exam definition of diseconomy of scale?
Answer
An increase in average cost per unit as a business grows beyond its optimal size.
💡 Hint
Average cost rises beyond optimal
Question
The sweet spot is where ___
Answer
Average costs are at their lowest — the optimal scale of production.
💡 Hint
Lowest average cost
Question
In 10-mark questions about growth, argue ___
Answer
Both sides: economies of scale benefits AND potential diseconomies if growth is too fast.
💡 Hint
Both sides
Question
Quick: PTFMM = ?
Answer
Purchasing, Technical, Financial, Managerial, Marketing economies.
💡 Hint
Please Try Finding More Money
Question
Car manufacturer buying steel in huge quantities gets ___
Answer
Lower price per tonne than a small workshop — purchasing economies of scale.
💡 Hint
Purchasing economies
Question
Mnemonic for economies of scale types?
Answer
'Please Try Finding More Money' — Purchasing, Technical, Financial, Managerial, Marketing.
💡 Hint
PTFMM
Question
Global fast-food chain example of diseconomies?
Answer
Some locations waste food because head office can't monitor every store closely — inefficiency.
💡 Hint
Can't monitor everything
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