Economies of scale and diseconomies of scale

What are the economies of scale

(Really Fun Mums Try Making Pies)

• Risk bearing

• Financial

• Managerial

• Technical

• Marketing

• Purchasing

Explain managerial eos

• As firm gets larger, it can employ specialist managers

• The managers can monitor workforce and boost productivity

• They bring specialist skills, leading to higher productivity

Explain technical eos

• Specialist machinery boosts productivity

• Avg cost falls

Explain purchasing eos

• Firm grows, therefore it can buy in bulk and get discount

Marketing eos

• Bulk buy advertisement

Financial eos

• As business grows, they can negotiate lower rate of interest when they get a loan from bank

• The firm is profitable and reputable, the bank will think they’re of low risk

Risk bearing eos

• As a business gets larger, it can spread its risks

What are the diseconomies of scale

• Control

• Communication

• Coordination

• Motivation

(3 Cs 1M)

Control deos

• As firm gets larger, there’s so many more workers, difficult to control

• Workers may be less productive if they know managers aren’t paying attention

Communication deos

• It takes time to spread messages

• Impacts productivity

Coordination deos

• It’s difficult for different departments to work and coordinate together

• Making sure they’re all working in the same way is difficult

Motivation deos

• Workers may feel less valued as they can be easily replaced

• This lowers their motivation and productivity