3.3.3 Economies and diseconomies of scale

economies of scale

cost advantages of production on a large scale as a result firms will exrience increasing returns to scale

diseconomies of scale

average costs rise with increaisng outut the firm exeriences decreasing returnes to scale

increasing retunrs to scale

occurs when an increase in inuts leads to a larger than proportional increase in output

%change in output > % change in input

decreasing returns to scale

occurs when an increase in the quantity of inputs leads to a less than proportional increase in the quantity of output

%change in output _< % change in input

internal economies of scale

when unit costs of one firms falls as outut increases

tyes of internal economes of scale

• purchasing

• risk bearing

• financial

• technical

• managerial

• marketing

Financial economies of scale

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

Managerial economies of scale

Large firms will be able to employ specialist manager who are more efficient at certain tasks and make better decisions.

number of managers isnt depended on production scale so reduces management cost per unit

marketing economies of scale

• large firms spread the cost of advertising over a large number of sales reducing ac

• reuse marketing materials in different geographical regions

• cost per product of advertising several products may be also lower than cost of advertising just one as can advertise several products at once

• benefit from brand awareness so less advertising needed

purchasing economies of scale

buy raw materials in greater volumes and receive a bulk purchase discount

Technical economies of scale

• production line methods can be used by large firms to make a lot of things at a low cost

• invest in more specialist and expensive machinery increasing production

• workers can specialise

• get bigger warehouse cheaper per m²

risk bearing econoies of scale

large firms can diversify into different prodcut areas and marjet so more predictable oevrall demand more able to take risks as if product is unsuccesful other sales will absorb cost of failure

external economies of scale definition

cost benefits for members because they are members of an industry or because of their location

tyes of external economies of scale

• ancillary firms move closer to major manafacturers to cut costs and generate more bsiness

• improved transport links develo around growing industries

• increase in skilled labour can lower cost larger the geograhic cluster the larger pool of skilled labour colleges teach skills required

• favourable legislation

examle of georgahic cluster

• car manufacters in sunderland rely on the service of 2500 ancillary firms

• silicon valley california large pool of highly skilles technology workers creates a network that benefits firms by attracting talent and sharing ideas

example of transport links

transport links around the M4 corridor tech area between reading and bracknell have experienced significant improvement

example of favourable legislation

animation cluster in bristol and bath is growing due to tax incentives offered to the industry by the government

internal diseconomies of scale

• wastage and loss can increase as materials seem in plentiful supply and large warehouses can lead to mroe things being lost and mislaid

• communication more difficult affecting staff morale

• managers less able to control wat goes on

• harder to coordinate activities between different fivisions and deparrments

• workers might put their departments interests before the companies leading to less cooperation and lower efficienc

external diseconomies of scale

• as a whole industry increase price of raw materials increases as higher demand

• buying large amounts may not make the cheaper per unit

returns of scale grah

• when returns to scal are increasing lrac will fall

• when returns to scal are constant lrac will stay the same

• when returns to scale are decreasing lrac will rise

• lrac are minimises at the minimum efficient scale of rosuction

minimum efficient scale

lowest cost point on a long run average total cost curve lowest possible cost er unit that a firm can achieve in the long run

constant returns to scale

where firms increase inuts and receive an increas ein outut by same %