Page 222 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 4 Operations management

Financial economies
Lenders, such as banks, often prefer to lend to large businesses because they

consider them less of a risk than smaller businesses. As a result, large businesses
find it easier to borrow money and often do so at a lower rate of interest than

smaller businesses.
Managerial economies
As a business grows, it often employs specialist managers for the diff erent

functional areas of the business such as marketing, finance, operations and human
resources. Specialist managers improve the quality of business decisions and make
fewer mistakes than non-specialist managers.
Computer-aided
manufacturing (CAM): Marketing economies
see Chapter 15, page 211. While total marketing costs rise as a business gets larger, they do not rise at the
same rate as sales output. So, if a business doubles its output and sales, it will not

need to double its marketing costs. This means that the average
cost of marketing falls as output and sales increase.
Purchasing economies
Large businesses usually buy greater quantities of raw materials
and goods than smaller businesses. Suppliers oft en off er
discounts on large, or bulk, purchases. Small businesses do not
benefit from discounts. Purchasing economies are sometimes

called ‘bulk-buying economies’.
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Technical economies

Large businesses usually use flow production to produce
their output. This method of production often uses the

Large container ships carry more latest technology, such as computer-aided manufacturing
containers than smaller ships at a (CAM). Such technology may be very expensive and only very large businesses can

lower unit cost afford the level of investment required. The technology enables businesses to
produce very high levels of output at lower unit costs than smaller businesses.
ACTIVITY 16.5

Ronaldo owns a business that manufactures cardboard boxes used by other companies when packaging their goods. The
capacity of Ronaldo’s current factory is too small for him to take on all of the orders he receives. He has decided to relocate
to a larger factory.
Identify and explain three economies of scale that Ronaldo might benefit from as a result of expanding his business.

Diseconomies of scale
Sometimes, a business grows so large that it loses the benefits of economies of scale.

KEY TERM Instead, it experiences the opposite – diseconomies of scale.
Diseconomies of scale are all due to the problems faced by management in
Diseconomies of scale: trying to control a business that has become too large. The main causes of these

factors that cause average costs
problems are:
to rise as the scale of operations
increases.
■ poor communication
■ demotivation of workers
■ poor control.