Economies of scale

Economies of Scale

The efficiencies that lower the average costs of production as a business increases its scale of output.

Internal Economies of Scale

Cost advantages that a business can achieve due to internal factors as it grows, such as purchasing and managerial efficiencies.

External Economies of Scale

Cost advantages that occur when the market or industry as a whole grows, benefiting individual businesses.

Purchasing Economy

Occurs when large firms buy raw materials in bulk, receiving discounts that lower their average costs.

Managerial Economy

Occurs when larger firms employ specialized managers to increase efficiency, thus lowering average costs.

Diseconomies of Scale

When average costs increase as a firm continues to grow and increase its output.

Productive Efficiency

The point at which a firm has minimized its average costs and cannot reduce costs further with increased output.

Bureaucracy

A system of administration characterized by excessive complexity, which can slow down decision-making and efficiency in larger businesses.

Poor Communication & Coordination

Challenges faced by larger firms where longer chains of command limit interaction and slow down communication.

Employee Commitment

The level of engagement and motivation employees feel towards their work, which can diminish in larger businesses due to reduced interaction with management.