Business Management Q3 - Growth & Economies of Scale

What is an example of an internal economy of scale?

• Reduced interest rates due to government policy

• Bulk purchasing of raw materials

• Improved transportation infrastructure

• Fluctuations in currency exchange rates

Answer explanation

Explanation: Internal economies of scale arise within a company as it grows. Bulk purchasing reduces the cost per unit of inputs.

Which of the following is an example of an external economy of scale?

• A company hiring more skilled employees

• Shared supplier networks in an industry cluster

• Lower energy consumption per unit

• Use of automation in production

Answer explanation

Explanation: External economies of scale benefit all firms in an industry, such as a concentration of suppliers and specialized labor in one location.

What is a potential disadvantage of economies of scale?

• Higher fixed costs

• Inflexibility in production processes

• Increased customer satisfaction

• Faster production times

Answer explanation

Explanation: Large-scale production can reduce a firm’s ability to respond quickly to changes in demand or market conditions.

What term describes the point at which a business grows so large that costs per unit begin to rise?

• Optimal production

• Diseconomies of scale

• Constant returns to scale

• Marginal cost increase

Answer explanation

Explanation: Diseconomies of scale occur when a firm grows too large, resulting in inefficiencies and higher average costs.

Which of the following is a common reason for diseconomies of scale?

• Improved supply chain management

• Increased employee productivity

• Poor communication across departments

• Greater investment in research and development

Answer explanation

Explanation: As firms grow, communication can become less effective, leading to inefficiencies and higher costs.

Why might a business choose to remain small instead of pursuing growth?

• To maintain closer customer relationships

• To maximize economies of scale

• To attract more investors

• To diversify its product line

Answer explanation

Explanation: Small businesses often value personalized service and direct interactions with their customers, which can be lost in larger organizations.

Which of the following is NOT a reason for a business to grow?

• To gain competitive advantage

• To diversify risks

• To reduce financial pressures

• To avoid diseconomies of scale

Answer explanation

Explanation: Businesses grow for benefits like market power or risk reduction, but diseconomies of scale are a risk of excessive growth.

How does diversification help a business grow?

• It reduces communication costs

• It increases dependency on one product

• It spreads risk across different markets or products

• It guarantees higher profit margins

Answer explanation

Explanation: Diversification reduces reliance on a single market or product, lowering the impact of market-specific risks.

What is a potential advantage of remaining small for a business?

• Increased bureaucracy

• Access to economies of scale

• Greater adaptability to market changes

• Higher fixed costs

Answer explanation

• Explanation: Small businesses can respond to market trends and changes more quickly than larger firms with complex structures.

Which of the following best describes productive efficiency?

• Achieving the lowest average cost of production while maximizing output

• Producing goods that meet customer needs

• Increasing sales revenue by improving marketing strategies

• Diversifying the product portfolio to minimize risks

Answer explanation

Explanation: Productive efficiency occurs when a firm produces at the lowest possible cost per unit, making the best use of resources without waste. This often involves operating at the lowest point on the average cost curve.