Economies of Scale

What is economies of scale?

As a company produces more units of a good or service, the average cost per unit decreases.

Draw and explain graph

As a firm operates on a larger scale, EOS are experienced, up to the optimal level of output (where avg costs are minimised). Any further increases in output bring about disEOS.

What happens when you have a larger company?

The larger the company the more purchasing power they have to buy large amount of product. This means they can dictate selling price and get a better deal.

Technical Economies of Scale

Large economies can afford more efficient production systems due to the money and they can spread fixed costs over a great output.

Managerial Economies of Scale

Large companies can afford sufficient managers to operate the business to run the business more efficiently

Financial Economies of Scale

Where larger companies can raise money cheaper than small companies because large companies are seen as less risky, borrows money at a lower cost

Marketing Economies of Scale

Large companies can afford marketing campaigns which will increase the knowledge of the company

Risk Bearing Economies of Scale

Large companies can have a broader range of products which reduces the risk as they have access to more markets

What is diseconomies of scale?

Diseconomies of scale occur when a firm grows so large that its average cost per unit increases as output increases.

Name the causes of diseconomies of scale

Internal diseconomies of scale arise from communication problems, motivational issues, managerial inefficiency, and technical diseconomies as a firm grows too large

Communication and coordination problems - Why is this a cause of DisEOS?

Information becomes slow, distorted, or lost as layers of management increase. Offices located in different countries → slower communication.

Motivational issues - Why is this a cause of DisEOS?

Workers feel less valued or engaged in large firms, reducing productivity.

Managerial inefficiency - Why is this a cause of DisEOS?

Too many managers - takes longer to make decisions

Technical diseconomies - Why is this a cause of DisEOS?

Very large machinery or production lines are harder to maintain, run less efficiently, or cause costly delays.