A-AS Level (CIE) Business Studies Paper-1: Specimen Questions with Answers 28 - 29 of 50

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Question 28


Write in Short

Short Answer▾

Explain the reasons of diseconomies of scale


Diseconomies refer to the disadvantages that accrues to a firm when the size of the firm increases beyond an optimum level leading to increase in the cost of production.

Reasons for diseconomies are:

  • Difficulties in communication caused due to longer chain of command
  • Slow decisions making process and delay in response to market changes.
  • Specialization causes small number of workers to become the ley personnel of production who can disrupt production.
  • Managers in the market with bigger size offers high wage rate to the labor and in return accept overmanning because the cost can be borne by the customers.

Question 29


Describe in Detail


What is fixed cost?


Definition: Fixed costs are those costs that are incurred as a result of the use of fixed factor inputs. They remain same in the short run at any level of output. Fixed costs, in the short-run, remain fixed because the firm does not change its of fixed factors employed. Fixed or supplementary costs usually include:

  • Payments of rent for building.
  • Interest paid on capital.
  • Insurance premiums.
  • Depreciation and maintenance allowances.
  • Administrative expenses - salaries of managerial and office staff etc.
  • Property and business taxes, license fees etc.

These costs are overhead costs in the sense that they are to be incurred even if the firm is shut down temporarily and the current production may be nil. Further, they do not change as the output increases. Thus, fixed costs are also referred to as “unavoidable contractual costs” which occur even if there is no output. Thus, the costs which are incurred on the business plant are known as fixed costs. Fixed costs may be classified into two categories:

  • Recurrent
  • Allocable

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