ECONOMIES OF SCALE

What are economies of scale?

Economies of scale occur when an increase in the scale of production leads to a lower average cost per unit.

What is diseconomies of scale?

Diseconomies of scale occur when a business becomes too large and average costs per unit start to rise.

What are internal economies of scale?

Cost advantages a business experiences as it increases production, which come from within the business.

Name the main types of internal economies of scale.

1. Technical economies
2. Purchasing economies
3. Managerial economies
4. Financial economies
5. Marketing economies
6. Risk-bearing economies

What are technical economies of scale?

Cost savings from using more efficient or specialist equipment and machinery in production.

What are purchasing economies of scale?

Cost savings from buying inputs in bulk at lower prices.

What are managerial economies of scale?

Savings from employing specialist managers who improve efficiency.

What are financial economies of scale?

Large firms can access finance at lower interest rates due to lower risk for lenders.

What are marketing economies of scale?

Cost per unit of marketing falls because large firms can spread advertising costs over more units.

What are risk-bearing economies of scale?

Large firms can diversify products or markets to reduce risk.

How do businesses benefit from internal economies of scale?

Lower average costs lead to:

• Higher profits
• Competitive pricing
• Ability to invest and expand

What are external economies of scale?

Cost advantages that occur when an entire industry grows, benefiting all firms in that industry.

Give examples of external economies of scale.

• Improved transport links
• Skilled labour pool
• Supplier networks
• Research and development shared across the industry

How do businesses benefit from external economies of scale?

• Reduced costs
• Access to better infrastructure and resources
• Easier recruitment of skilled staff

What are internal diseconomies of scale?

Rising average costs due to the business becoming too large to manage efficiently.

What are common reasons for internal diseconomies of scale?

• Communication problems
• Poor coordination
• Low morale
• Bureaucratic delays
• Duplication of effort

What problems can internal diseconomies of scale cause?

• Higher average costs
• Slower decision-making
• Decreased efficiency
• Lower profits

Why do small firms survive despite economies of scale?

1. Flexibility to adapt quickly
2. Personalised customer service
3. Niche markets
4. Lower bureaucracy
5. Specialist knowledge

How do economies of scale impact a business?

Lower costs \rightarrow lower prices or higher profits \rightarrow potential for expansion \rightarrow competitive advantage.

How do diseconomies of scale impact a business?

Higher costs \rightarrow reduced profits \rightarrow inefficiency \rightarrow possible loss of market share.

How do economies of scale affect employees?

Can create more jobs through expansion or improve training opportunities; may also lead to specialisation.

How do diseconomies of scale affect employees?

Low morale, poor communication, and inefficiencies may reduce job satisfaction.

How do economies of scale affect consumers?

Lower prices, better quality products, and more choice.

How do diseconomies of scale affect consumers?

Higher prices or lower quality due to inefficiency.

How do economies of scale affect suppliers?

Large firms may buy in bulk, giving suppliers more business but potentially demanding lower prices.

How do diseconomies of scale affect suppliers?

Poor communication or inefficiency in large firms may reduce orders or cause late payments.