Economies and diseconomies of Scale

diseconomies of scale

when average Costs start to rise with increased output.

ineffective communication

when it is difficult to coordinate large numbers of staff, leads to miscommunication

What are supplier economies?

-A network of suppliers may be attracted to an area where particular industry is growing -Lots of supplier businesses near to each other reduces buying costs and allows the use of systems such as JIT

What are technical economies?

-As a business grows they are able to purchase more specialist equipment and use newer methods of production -Increases efficiency and productivity -Reduces average costs of output

What are managerial economies?

-As a business grows they will be able to employ specialist managers who will know how to get the best out of the business -Increases efficiency and reduces the average cost of production

What are financial economies?

-As a business grows they will have access to a wider range of finance and will have more assets for security when borrowing money

What are marketing economies?

-As a business grows, money spent on advertising will have a greater effect on the business e.g. having more stores means more places to advertise

What impact does economies of scale have on stakeholders?

-Consumers: significant price drops in some market segments e.g. electronics and clothing -Shareholders-Businesses increasing in size results in increased share values. -Some businesses have increased their scale to such an extent they are monopoly businesses (eliminates competition) -Suppliers: finding themselves under pressure to provide cheaper goods and services

What are financial economies?

-Financial services can improve with financial institutions providing services particularly geared to a particular industry

What are educational economies?

-Local colleges may set up training schemes suited to the industry with the largest sector/number of employees -This reduces recruitment and training costs for businesses in that industry

What is meant by internal economies of scale?

-Reduction in average cost per unit of output as a result of increasing internal efficiencies within a business -These can be purchasing, technical, financial, managerial or marketing

What is meant by external economies of scale?

-The advantages of scale that benefit a whole industry and not just an individual business e.g. financial services, educational and supplier -Very large businesses often benefit from external economies of scale

What is meant by economies of scale?

-The reduction in average costs of production that occur as a business increases its scales of production. -The cost of producing falls as output increases, this gives larger businesses a competitive edge over smaller businesses

What are purchasing economies?

-When a business grows they require more raw materials/components which may result in discounts and unit costs falling. -This reduces the average cost of production

What can economies of scale be broken down to?

Two broad groups- internal and external

reduced motivation

When workers feel unappreciated and productivity begins to fall