4.5 Economies and Diseconomies of Scale

Marketing economies of scale

Firms can spread advertising and branding costs over a larger output, reducing the cost per unit

Managerial Economies of Scale

As firms grow, they can hire specialised managers to oversee different areas, improving efficiency and productivity 

What is the difference between internal and external economies of scale

Internal economies of scale occur within a firm as it grows, leading to lower average costs 

External economies of scale occur outside a firm, benefiting all firms in a market due to factors like improved infrastructure 

Financial Economies of Scale

Bigger firms usually have better access to credit and can borrow lower interest rates due to their size and reputation

Technical Economies of Scale

Larger firms can invest in more efficient and high capacity capital, lowering average production costs

Purchasing economies of scale

Large firms can buy raw materials in bulk and negotiate lower prices from suppliers

What is the minimum efficient scale (MES)

The lowest level of output at which a firm can produce such that is long-run average costs are minimized. At this point, the firm had fully exploited all available economies of scale, and producing beyond this output does not lead to further reduction in average costs

Risk-Bearing 

Economies of Scale - Large firms can diversify their product lines and markets, reducing the impact of failure

What are the reasons for diseconomies of scale

Diseconomies of Scale arise when a firm's growth leads to inefficiencies, 

• Control

• Communication

• Coordination

• Motivation