Economies and diseconomies of scale 3.4 aqa a level business

What do economies of scale mean?

The larger the business the cost of producing each item decreases.

Internal economies of scale

Increase efficiency in the business

What are the 4 types of economies of scales?

Technical, Managerial, Purchasing and Marketing

Technical economies of scale

- related to production

- methods for large volumes more efficient

- large businesses can a afford better, advanced machinery - fewer staff, wage costs will fall

Managerial economies of scale

Larger businesses can afford to hire specialist functional managers, thus improving the organization's efficiency and productivity.

Purchasing economies of scale

Firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).

Marketing economies of scale

Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.

External economies of scale

The cost benefits that all firms in the industry can enjoy when the industry expands or is concentrated in one small area

What are 2 factors that influence external economies of scale?

Large number of suppliers

Skilled local labour force

Economies of scope

Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation

How does economies of scope and brand loyalty link?

Customers already know the brand and are going to be more likely to buy new products that the business produces

Diseconomies of scale

The situation in which a firm's long-run average costs rise as the firm increases output

Why do diseconomies of scale occur?

control - harder to monitor how productive workforce is as the workforce size increases as firm becomes larger and motivate a large group of people

co-ordination - it is harder and more complicated to coordinate every worker when there are 1000s of employees

communication - workers may start to feel alienated as the firm grows and this leads to a fall in productivity as their motivation is gone