1.5.1 - Economies & Diseconomies of Scale

What are economies of scale ?

They are the advantages that can sometimes occur as a result of increasing the size of a business

What are internal economies of scale ?

They are the efficiencies that occur as a result of the growth in the scale of production within the business

What are the different types of internal economies of scale ?

1. Financial economies

2. Managerial economies

3. Marketing economies

4. Purchasing economies

5. Technical economies

6. Risk bearing economies

What are financial economies ?

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

A cheaper loan lowers the cost per unit

What are managerial economies ?

Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost

What are marketing economies ?

Large firms spread the cost of advertising over a large number of slaes and this reduces the average cost

They can also reuse marketing materials in different geographic regons which further lowers the average cost

What are purchasing economies ?

Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount which lowers the average cost

What are technical economies ?

Occurs as a firm can use its machinery at a higher level of capacity due to the increased output thereby spreading the costs of the machinery over more units and lowering the average cost

What are risk bearing economies ?

Occur when a firm can spread the risk of failure by increasing its numbers of products

What are external economies of scale ?

It occurs when there is an increase in the size of the industry in which the firm operates

What are the external economies of scale ?

1. Geographic cluster

2. Transport links

3. Skilled labour

4. Favourable legislation

Explain geographic cluster

As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more businesses

This lowers the average cost

Explain transport links

Improved transport links develop around growing industries to help get people to work and to improve the transport logistics

This lowers the average cost

Explain skilled labour

An increase in skilled labour can lower the cost of skilled labour, thereby lowering the average cost

The larger the geographic cluster, the larger the pool of skilled labour

Explain favourable legislation

This often generates significant reductions in average cost as governments support certain industries to achieve their wider objectives

What are diseconomies of scale ?

As a firm continues increasing its scale of output, its average costs per unit will start to increase at some point

What are the different types of diseconomies of scale ?

1. Management diseconomies

2. Communication diseconomies

3. Geographical diseconomies

4. Culture diseconomies

What are management diseconomies ?

Occur when managers work more in their self interest than in the interest of the firm

What are communication diseconomies ?

Occur when a firm’s organisational structure becomes more complex with multiple layers of management resulting in communication difficulties

This leads to slow responses and increased average costs

What are geographical diseconomies ?

Occur when a firm has widespread bases of operations across multiple geographic locations

This leads to logistical and communication challenges which can raise average costs

What are cultural diseconomies ?

Occur when a firm expands into foreign markets in which workers have very different work or productivity norms