economies and diseconomies of scale

internal - Technical economies of scale:

Large-scale businesses can afford to invest in expensive and specialist capital machinery. For example, Tesco or Sainsbury’s can invest in technology that improves stock control. It might not, however, be viable or cost-efficient for a small corner shop to buy this technology.

internal - Marketing economies of scale

A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market.

A good example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts.

The major food retailers also have buying power when purchasing supplies from farmers and other suppliers.

internal - Purchasing/ Commercial economies of scale

These are gained when larger firms buy in bulk and achieve purchasing discounts. For example, a large supermarket chain can buy its fresh fruit in much greater quantities than a small fruit and vegetable supplier.

internal - Risk bearing economies of scale

Risk-bearing economies of scale is the ability of large firms to spread the costs of uncertainty over a wider range of activities and therefore reduce their unit cost.

internal - Managerial economies of scale

This is a form of division of labour. Large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources.

internal - Financial economies of scale

lower interest rates on loans

external economies of scale

include the benefits of positive externalities enjoyed by firms as a result of the development of an industry or the whole economy.

 research and development facilities in local universities that several businesses in an area can benefit from

 Spending by a local authority on improving the transport network for a local town or city

 Relocation of component suppliers and other support businesses close to the main centre of manufacturing are also an external cost saving

 Reputation of the area improves as it becomes known for a particular industry.

 Attracts other businesses.

All of these combine to provide a mutual advantage to the businesses in the area.

internal diseconomies of scale

Diseconomies of scale occur when a business grows so large that the costs per unit increase. As output rises, it is not inevitable that unit costs will fall. Sometimes a business can get too big.

• Poor communication

• Lack of motivation / co-operation

• Control

• Co-ordination

external diseconomies of scale

These diseconomies arise due to much concentration and localization of industries beyond a certain stage. Localization leads to increased demand for transport and, therefore, transport costs rise. Similarly, as the industry expands, there is competition among firms for the factors of production and the raw-materials. This raises the prices of raw-materials and other factors of production.

• Diseconomies of Pollution: health hazard for the labourers, the social cost of production rises.

• Diseconomies of Strains on Infrastructure: the transportation of raw materials and finished goods gets delayed, costs of production rise.

• Diseconomies of High Factor Prices: keener competition

  among the firms for the factors of production, prices of the factors of

  production go up.

factors affecting growth

 Extent and quality of fixed assets (e.g. equipment, IT systems)

 Skills, ability and motivation of the workforce

 Methods of production organisation

 External factors (e.g. reliability of suppliers)

how to improve productivity

 Measure performance and set targets

 Streamline production processes

 Invest in capital equipment

 Invest in employee training

why is productivity important

• Lower unit costs

• Improved competitiveness and trade performance

• Higher profits

• Higher wages

• Productivity improvements

Benefits of New Investment

• Productivity Increases

• Improved quality

• Increased profits

Drawbacks of New Investment

• Cost

• Return

• Motivation

Positive Implications of Growth

• may motivate staff to achieve professional and personal goals, buoyed up by current performance or growth rates

• Management bonuses based on performance in achieving growth targets provide motivation to go on achieving growth

• Business owners might have set growth rate targets as a way of increasing productivity and securing a higher return on investment.

Negative Implications of Growth

• shortage of raw materials with which to make products if they are not ordered in time to meet the growth in orders

• shortage of trained staff required to complete the increased volume of tasks

• Business relationships with the existing customer base may suffer as staff members are expected to meet the needs of additional customers, especially if there is no corresponding increase in resources to support this.