Economies & Diseconomies of scale

What are diseconomies of scale?

Diseconomies of scale occur when a firm increases output and this leads to an increase in average cost of production.

Examples of diseconomies of scale

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Examples of external economies of scale

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Examples of internal economies of scale

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What are internal economies of scale?

Internal economies of scale refer to the efficiency of production within in a firm.

Labour relations (lack of communication)

Large firms often require large workforces - poor communication between managers and workers may lead to workers losing motivation if they feel isolated. This will lead to a fall in productivity and an increase in average labour costs per unit of output.

Managerial

Relates to the division of labour of firms; firms can employ specialists to supervise production systems and improve management, communication, which raises productivity and reduces unit costs

Skilled Labour

Relates to the efficiency of a firm's production; skilled labour can make more products quicker, lowering unit costs

Marketing

Relates to the firm's marketing techniques; for example advertising and promoting products

Purchasing

Relates to the firm's purchasing; for example bulk buying supplies and raw materials

Infrastructure

Relates to the growth of an industry; growth may encourage a government and private sector firms to provide better road links, electricity supplies, etc to increase productivity in an efficient and convenient way.

Bureaucracy

As a firm grows larger, decision making processes becomes more complicated and lengthy - this wastes time and potentially increases average costs. Information can also be distorted or lost from passing from one department to another.

What are economies of scale?

Economies of scale are benefits which occur when a firm increases output and this leads to a reduction in average cost of production.

What are external economies of scale?

External economies of scale refer to the entire industry that a company is in.

Technical

Relates to the efficiency of the firm's capital; for example transportation and machinery - large scale businesses can afford to invest in expensive and specialist capital machinery.

Ancillary firms

Relates to the firm's cost of production. Firms can receive vital parts cheaply and efficiently if located in an area with nearby similar firms/factories.

Financial

Relates to the firm's finance - credit based (from banks); larger firms have more credit, therefore they can get more loans with lower interest rates compared to small firms with little credit. Larger firms also have more ability to pay back.

Risk-bearing

Relates to the firm's likelihood and ability to diversify into other markets. Large firms can afford to go into other markets, and have other departments widely spread in other countries as a back up/safety net.