(Dis)economies of Scale

Economies of Scale

Businesses aim to grow is to benefit from economies of scale. This refers to lowering the average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency.

Fixed Costs:

Business costs, such as rent, that are constant whatever the quantity of goods or services produced.

Average cost

the cost per unit of output: Calculation: Total cost / quantity of output = average cost

Average variable cost

Total variable cost / quantity of output

Variable Cost

Variable costs are costs that change as the quantity of the good or service that a business produces changes.

Internal economies of scale

technical, financial, managerial, specialization, marketing, purchasing, risk-bearing

Diseconomies of scale

when an organization becomes too large, causing productive inefficiencies that result in an increase in the costs of production. 

Effects of diseconomies of scale

Business becomes outsized and inefficient, so the average cost of production begins to rise. Internal diseconomies of scale can occur due to mismanagement: lack control and coordination, poorer working relatinoships, lower productivity due to outsourcing, complacency

External economies of scales

cost-saving benefits of large-scale operations arising from outside the business due to its favorable location or general growth in the industry

Examples of External EOC

technological porcess, improved transpotation networks, skilled labor, regional specialization

External diseconomies of scale

occur once there is an increase in the average cost of production when a firm grows due to factors beyond its control --> average costs of production increases for all businesses

Examples of external DOS:

higher rents, higher pay and financial rewards --> increases cost without generating more output, traffic congestion