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Business_A-level_Edexcel

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  1. 1-marketing-and-people

    1-1-meeting-customer-needs
    3 主题
  2. 1-2-market
    5 主题
  3. 1-3-marketing-mix-and-strategy
    5 主题
  4. 1-4-managing-people
    5 主题
  5. 1-5-entrepreneurs-and-leaders
    6 主题
  6. 2-managing-business-activities
    2-1-raising-finance
    4 主题
  7. 2-2-financial-planning
    4 主题
  8. 2-3-managing-finance
    3 主题
  9. 2-4-resource-management
    4 主题
  10. 2-5-external-influences
    3 主题
  11. 3-business-decisions-and-strategy
    3-1-business-objectives-and-strategy
    4 主题
  12. 3-2-business-growth
    4 主题
  13. 3-3-decision-making-techniques
    4 主题
  14. 3-4-influences-on-business-decisions
    4 主题
  15. 3-5-assessing-competitiveness
    3 主题
  16. 3-6-managing-change
    3 主题
  17. 4-global-business
    4-1-globalisation
    5 主题
  18. 4-2-global-markets-and-business-expansion
    5 主题
  19. 4-3-global-marketing
    3 主题
  20. 4-4-global-industries-and-multinational-corporations
    3 主题
  21. 5-exam-technique
    5-1-the-exam-papers
    4 主题
  22. 5-2-business-studies-skills
    1 主题
  23. 5-3-structuring-your-responses
    5 主题
  24. 6-pre-release-preparation
    2025-pre-release-music-industry
    9 主题
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Reasons to grow

  • Businesses grow to achieve a range of key objectives

Graph showing long-run average cost curve, illustrating economies of scale, lowest average cost at productive efficiency and diseconomies of scale.
Economies of scale occur when average costs decrease with increasing output, and diseconomies of scale occur when average costs increase with increasing output

1. Economies of scale

  • Internal economies of scale

    • As a business grows, it can reduce its average costs

    • For example, it may be able to buy supplies in bulk or invest in more efficient machinery

  • External economies of scale

    • These are benefits that come from being part of a growing industry, such as better infrastructure or access to a skilled workforce

2. Increased market power

  • A larger business may have more control over customers and suppliers

  • It can influence prices or force suppliers to offer better terms, such as longer trade credit periods

3. Increased market share and brand recognition

  • Growth allows a firm to reach more customers and become better known

    • This can lead to higher sales and increased customer loyalty

  • Increased brand recognition can help further growth, as customers are familiar with and trust the brand

4. Increased profitability

  • Profitability is a measure of how efficiently a company generates profit relative to its revenue or investment

    • As a firm grows, it may be able to generate more revenue while controlling costs, boosting profitability

Explaining economies of scale

  • As a business grows, it can increase its scale of output, generating efficiencies that lower its average costs of production

    • These efficiencies are called economies of scale

    • Economies of scale help large firms to lower their costs of production beyond what small firms can achieve

  • As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

    • The reasons for the increase in the average costs are called diseconomies of scale

  • Internal economies of scale occur as a result of the growth in the scale of production within the firm

Economies of scale

Graph showing long-run average cost curve, illustrating economies of scale, lowest average cost at productive efficiency and diseconomies of scale.
Economies of scale occur when average costs decrease with increasing output, and diseconomies of scale occur when average costs increase with increasing output

Diagram analysis

  • With relatively low levels of output, average costs are high

  • As the business increases its output, it begins to benefit from economies of scale, which lower the average cost per unit

  • At some level of output, a business will not be able to reduce costs any further — this point is called productive efficiency

  • Beyond this level of output, the average costs will begin to rise as a result of diseconomies of scale

Types of internal and external economies

Internal economies of scale

  • Internal economies of scale occur as a result of the growth in the scale of production within the business

    • The firm can benefit from lower average costs generated by factors that are inside the business

Types of internal economies of scale

Type

Explanation

Financial economies

  • Large firms often receive lower interest rates on loans than smaller firms, as they are perceived as less risky

  • A cheaper loan lowers the cost per unit

Managerial economies

  • Occur when large firms can employ specialist managers who are more efficient at certain tasks, and this efficiency lowers the average costs

  • Managers in small firms often have to fulfil multiple roles and are less specialised

Marketing economies

  • Large firms spread the cost of advertising over a large number of sales, and this reduces average costs

  • Firms can also reuse marketing materials in different geographic regions, which further lowers average costs

Purchasing economies

  • Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount, which lowers average costs

Technical economies

  • Occur as a firm can use its machinery at a higher level of capacity due to the increased output

  • This spreads the cost of the machinery over more units, lowering average costs

Risk-bearing economies

  • Occur when a firm can spread the risk of failure by diversifying its product range

  • A lower incidence of failure can reduce average costs

External economies of scale

  • External economies of scale occur when there is an increase in the size of the industry in which the firm operates

    • The firm benefits from lower average costs generated by factors outside of the business 

Sources of external economies of scale

Source

Explanation

Geographic cluster

  • As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more business

    • E.g. car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms

Transport links

  • Improved transport links develop around growing industries to help get people to work and improve the transport logistics

    • E.g. Bangalore, India’s Silicon Valley, has benefitted from large transportation projects that have transformed the movement of people and goods in the region

Skilled labour

  • An increase in skilled labour can lower the cost of skilled labour, thereby lowering average costs

  • The larger the geographic cluster, the larger the pool of skilled labour

Favourable legislation
 

  • Changes to laws affecting businesses can generate significant reductions in average costs

  • Governments support certain industries to achieve important economic objectives 

Problems arising from growth

  • Rapid business growth may create challenges that can negatively impact a company’s operations and financial performance

  • Three of these challenges are diseconomies of scale, internal communication issues and overtrading

1. Diseconomies of scale

  • This occurs when a company grows too large, making it difficult to manage and control its operations

  • It may face challenges in coordinating its various departments, managing its workforce or maintaining quality control

  • The cost per unit ends up increasing as a result of these inefficiencies

2. Internal communication

  • Rapid growth may strain communication channels or result in miscommunication, causing conflicting priorities and a lack of coordination

  • This may result in delays, errors and missed opportunities, as well as impact employee morale

3. Overtrading

  • This occurs when a company takes on more business than it can handle, leading to a strain on its resources or an inability to meet its financial obligations (lack of liquidity)

  • This may cause cash flow problems or decreased customer satisfaction

    • E.g. a company that expands too quickly may struggle to hire and train enough staff to handle increased demand, leading to a backlog of orders and dissatisfied customers

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