1.2.3 Economies of scale

economies of scale

falling average costs due to expansion

diseconomies of scale

rising average costs when a firm becomes too big

internal economies of scale

cost benefits that an individual firm can enjoy when it expands

bulk buying

buying goods in large quantities, usually cheaper than buying in small quantities

external economies of scale

cost benefits that all firms in an industry can enjoy when the industry expands

bureaucracy

system of administration that uses a large number of departments and officials

internal economies of scale examples

purchasing/ marketing/ technical/ financial/ managerial/ risk bearing

purchasing economies of scale

large firms buying many resources recieve cheaper rates; suppliers offer discounts to firms buying raw materials and components in bulk( bulk buying is a purchasing economy)

marketing economies of scale

occur as some marketing costs( e.g. an advert) are fixed; can be spread over more units of output for a larger firm; average costs of an advert is smaller for a large firm

technical economies of scale

can occur as large factories are more efficient than smaller ones( more specialisation occurs and more investment put into machinery); large firms may make better use of an essential resource( e.g. machinery) compared to a smaller firm; resource utilised more to lower average costs

financial economies of scale

wider variety of sources of money( e.g. shares which are unavailable to a sole trader); pressure can be put on banks when negotiating prices of loans( banks are more likely to lend large amounts to large companies at lower interest rates)

managerial economies of scale

expanding firms can afford specialist managers, improving efficiency and decreasing average costs, whilst small businesses may employ general managers in charge of several areas, who may find the row demanding and be weak in some areas of the job

risk bearing economies of scale

wider product ranges and wider variety of markets reduces the risk in business

external economies of scale examples

skilled labour/ infrastructure/ access to suppliers/ similar businesses in the area

skilled labour

if an industry is concentrated in one area, there may be a build- up of labour with skills/ work experience required by the industry leading to lower training costs to recruit workers as local schools/ colleges may be providing vocational courses required by the local industry

infrastructure

particular industry dominating a region means that facilities will be shaped to suit the industry’s needs

access to suppliers

established industry in a region will encourage suppliers in that industry to set up close by, benefitting all firms

similar businesses in the area

firms in the same industry located close to each other are likely to cooperate with ech other for collective profit

diseconomies of scale examples

bureaucracy/ communication problems/ lack of control/ distance between top management and workers at the bottom of the organisation

bureaucracy

too many resources used in administration, leading to slow decision making and long communication channels, raising average costs

communication problems

large organisations may have workers across the world; time differences and language barriers in different countries

lack of control

difficult to control and coordinate, many employees and plants require more supervision and layers of management, raising costs

distance between top management and workers at the bottom of the organisation

relations between managers and workers in large firms may worsen, as they are unaware of the needs of those at the bottom of the organisation, leading to demotivated workers, conflict, and wasted resources to resolve