ECONOMIES OF SCALE
LEARNING OUTCOMES
• Economies of Scale
• Internal Economies of Scale
• External Economies of Scale
ECONOMIES OF SCALE
Large Firms can usually produce goods more cheaply than small firms.
Economies of Scale = Financial
advantages of producing
something in very large
quantities.
The size of a firm has an important effect on the AVERAGE COSTS of production.
FIRM SIZE ↑ AVERAGE COSTS ↓
ECONOMIES OF
SCALE
INTERNAL EXTERNAL
Purchasing Skilled Labour
Marketing Infrastructure
Technical Ancillary and commercial
Financial services
Managerial Cooperation
Risk – bearing
INTERNAL ECONOMIES OF SCALE
Marketing economies
PURCHASING ECONOMIES FINANCIAL ECONOMIES
Large Business – Large businesses –
Large Output – Banks are willing to lend to
Bulk buy the resources – large businesses.
Get Discounts – At lower interest rates –
Average Costs fall Average costs fall.
MANAGERIAL ECONOMIES
MARKETING ECONOMIES Large businesses –
Large business – Afford specialist managers –
Produce a large no. of units Specialized in their field of
The marketing costs are world; having the required
spread over more units . – knowledge, skills & experience.
Average cost of the advert is Improve the efficiency of the
smaller for a large business. business –
Average cost falls
TECHNICAL ECONOMIES
Large businesses – RISK- BEARKING ECONOMIES
Use advanced machinery – Large businesses -
Lead to increased Produce a wider/larger product
production: faster & less range in a variety of markets.
mistakes. Reduce the risk
Average Costs fall. Positive effect on costs
EXTERNAL ECONOMIES OF SCALE
Cooperation
External economies of scale
External economies of scale: Cost benefits that all firms in the industry can enjoy when the
industry expands.
• Skilled labour - If an industry is concentrated in one area, there may be a build-up of labour
with the skills and work experience required by that industry. As a result, training costs will be
lower when workers are recruited.
• Infrastructure - If a particular industry dominates a region, the roads, railways, ports, buildings
and other facilities will be shaped to suit that industry’s needs.
• Ancillary and commercial services - When firms in the same industry are located close to each
other they are likely to cooperate with each other so that they can all gain. For example, they
might work together to share the cost and benefits of a research and development centre.
DISECONOMIES OF SCALE
RISING AVERAGE COSTS WHEN A FIRM BECOMES TOO BIG
(Business grows beyond a certain Size).
DISECONOMIES OF SCALE
BUREAUCRACY ( ↑ Inefficiency, Average cost↑)
• Too many resources used in administration
• Decision making maybe too slow
• Communication channels too long
LABOUR RELATON
( Problems between the manager & workers, Demotivation of the worker, start to
make mistakes/errors, wastage of resources, Average costs ↑)
• Relationship between workers & managers deteriorate
• Management fail to understand workers, lead to demotivation
CONTROL AND COORDINATION
•
OTHER LIMITS TO GROWTH
Diseconomies of scale can discourage businesses from growing too big. However, there
are other barriers that might prevent a business from growing in size.
• LACK OF FINANCE – Some businesses would to grow, but are unable to raise the
finance needed to expand. E.g. Investment in property, machinery more labour etc.
• NATURE OF THE MARKET – Some markets ae too small to sustain very large companies
. E.g. market for luxury private jets.
• LACK OF MANAGERIAL SKILLS – Some businesses may be prevented from growing
because the owners do not have the managerial skills required to run a large business
operation.
• LACK OF MOTIVATION – Some business owners do not want to grow their businesses.
They may be happy running a small business.
Questions
Q1. Define the term Economies of scale. (1)
Q2. Define the term Diseconomies of scale. (1)
Q3.Explain one benefit to a business experiencing economies of scale. (3)
Q4. Explain one reason why diseconomies of scale may occur in a business. (3)
Thank you!
