economies of scale

Economies of scale

any decreases in LRAC that result from a firm altering all factors of production in order to increase its scale of output

what does an economy of scale intially return

increasing returns to scale for the firm

How do firms achieve economies of scale?

Specialization
Division of labor
Bulk buying
Financial economies
Transport economies
Large machinery
Promotional economies

How do firms achieve economies of scale?
Specialization:

specialization of labor leads to more efficiency and lower unit costs

(e.g., specialized management roles vs. one manager taking on many different roles)

How do firms achieve economies of scale?
Division of labor:

Breaking down production processes into smaller parts to increase efficiency (e.g., assembly line production)

How do firms achieve economies of scale?
Bulk buying:

Discounts on larger supplies of raw materials (reduced production costs)

How do firms achieve economies of scale?
Financial economies:

Easier for large firms to raise money (more investment for firm, less risk for lenders)

How do firms achieve economies of scale?
Transport economies:

Larger firms buying in bulk may pay less in transport costs, or may have their own transport fleet (e.g., Amazon)

How do firms achieve economies of scale?
Large machinery:

Some machinery is too big for small producers; larger firms need larger machinery (e.g., combine harvesters)

How do firms achieve economies of scale?
Promotional economies:

As a firm increases its output and revenue, expenditure on advertising/publicity remains constant (and therefore falls as the firm grows)

diseconomies of scale

any increases in LRAC that result from a firm altering some or all factors of production in order to increase their scale of output HOWEVER it results in decreasing returns to scale for the firm

what causes diseconomies of scale?

1. Control/communication problems
2. Alienation/loss of identity
3. Slow decision making

what causes diseconomies of scale?
1. Control/communication problems

larger firms = more difficult to control
- less communication = lower efficiency

what causes diseconomies of scale?
2. Alienation/loss of identity

workers/managers loose sense of purpose/connection to the firm
- lost productivity

what causes diseconomies of scale?
3. Slow decision making

excessive beauracracy