3.3.3 Economies and Diseconomies of scale

Economies of scale

When an increase in output results in a decrease in average unit cost

Internal economies of scale

Cost advantages that a firm experiences as it increases its output

Technical economies

When a firm's average cost of production decreases as it grows in size and output

Managerial economies

When a larger business can afford to hire specialised managers, improving efficiency and productivity

Marketing economies

When a business's average cost per unit decreases as marketing expenses are spread across a larger volume of sales

Purchasing economies

When a larger business buys raw materials, allowing negotiating discounts from suppliers

Financial economies

Occurs when larger firms can borrow money at lower interest rates and have greater access to credit

Risk-bearing economies

When larger businesses reduce average costs by diversifying their products

Network economies

When the value of a product increases with the number of users who buy or use it

External economies of scale

Cost advantages that arise from external factors affecting the business

Labour economies

Cost advantages that arise from increasing production, leading to lower average cost per unit

Support services economies

Businesses providing products or services for large businesses move closer, reducing transport costs

Diseconomies of scale

Where average cost increases as output increases

Managerial diseconomies

Inefficiencies and increased average costs when a business's size overwhelms its management structure

Coordination and control problems

Managing various departments becomes complex and less efficient as a company grows larger

Worker alienation

Increased unit costs for a firm as it grows larger due to worker disengagement

Communication challenges

Increased complexity in management structure leads to longer chains of command

Possible causes of diseconomies of scale

Difficult communication, difficult coordination, principal-agent problem

Minimum efficient scale (MES)

The level of production at which a firm achieves the lowest possible long-run average cost per unit