Economies and Diseconomies of Scale

Economies of Scale

a fall in average or unit cost as the level of production increases.

Constant Returns to Scale

a unchanging average or unit cost as the level of production increases.

Diseconomies of Scale

an increase in average or unit cost as the level of production increases.

Internal Economies of Scale

• Technical Economies - the bigger the business becomes, the more likely it will be to invest in better technology.

• Marketing Economies - the more products a business produces, the more it can spread the advertising across each unit.

• Managerial Economies - large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee human resources. 

• Financial Economies - larger firms are usually better rated and receive better rates of interest.

• Purchasing Economies - As a firm grows and needs to purchase higher quantities of raw material it can negotiate better deals.

External Economies of Scale

• Development of R+D facilities in local universities that several businesses in the 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 is also an external cost saving. 

Diseconomies of Scale Causes

Main causes are the three C’s: communication, co-operation and control.

Solutions for Diseconomies of Scale

• Developments in human resource management – effective workforce which can improve efficiency. 

• Performance-related pay schemes – workers should be working towards the businesses aim. 

• Out-sourcing – reducing costs whilst retaining control over production – the process of businesses using services provided by an external provider.