Economies and Diseconomies of scale

Define internal economies of scale

Occurs within a businesses control - a business can exploit them

What are the internal economies of scale

Really - Risk Bearing: As a business gets larger they can spread their risk more by using more quantity produced

Fun - Financial: As a business grows larger they can get large loans at lower interest rates as they are considered safe to loan to

Mums - Managerial: As a firm grows in size they can hire specialist managers this will increase costs but these managers will bring their skills and will increase productivity and so will increased quantity produced by a larger amount so that average costs fall

Try - Technical: Bringing in specialist machinery as a firm gets bigger to boost productivity or hiring more workers and having them specialise in certain tasks

Making - Marketing: (Dal yapping)

Pies - Purchasing: Firms can begin to buy materials in bulk which will increase the costs of acquiring these materials but for more materials at a lower price decreasing average costs

How does each internal economy of scale work

Total costs are rising however quantity is rising at a faster rate

What is an external economy of scale

Businesses within the industry benefit from another firm increasing in size

What are the external economies of scale

Better transport infrastructure - new roads, airports, railways - This makes transport costs cheaper especially raw materials

Component suppliers move closer - Makes sense to be closer to huge buyers as then they can easily sell their components - also reduces difficulty to sell to other firms as well if they are close

R and D firms move closer - Then technology can be bought and improved to reduce long run costs

Define diseconomies of scale

If output increases too much then LRAC could begin to increase

What are the diseconomies of scale

3C’s and M

Control - As the workforce has grown so much managers will begin to struggle to manage workers - which will allow them to slack off reducing productivity

Coordination - making sure all departments are working in the same way for the same goal for example finance and the tech department may be trying to complete different goals resulting in a productivity fall

Communication - Very hard for messages to be sent across the firm for example a CEO setting a new goal will take ages to reach the workers or a manager with a good idea will take ages to reach the CEO impacting productivity due to wasted time

Motivation - As workforce grows and grows the individual worker will feel more and more obsolete that their job doesn’t really matter and is dispensable (Cog in the machine). So productivity will fall pushing up average costs