3.3.3 Economies and Diseconomies of Scale

• Types of Economies of Scale


  Marketing - the more people see an advert, the lower the cost per view

  Purchasing - the more units bought, the lower the cost per unit

  Managerial - the more specialised the staff, the lower the costs

  Risk - The more products, the less risk of the firm failing

  Financial - the higher the value of a loan, the lower the interest

  Technical - the better the equipment, the more can be produced, the lower the costs
• Economies of Scope


  Cost efficiency is achieved by producing a range of products
• Diseconomies of Scale

  As output rises average costs begin to rise
• ABC of Diseconomies

  • Alienation
  • Bureaucracy
  • Communication
• Alienation


  Working in a highly specialised role can be boring and unfulfilling so workers become demotivated and less productive causing output and quality to fall whilst costs remain the same
• Communication

  As a firm expands particularly if it merges with another firm communication takes longer and is less effective as expectations and practices become less clear
• Bureaucracy


  As firms grow there are more layers of management and more complex procedures they must follow so the firm becomes less flexible to changes in the market which jeopardises survival
• External Economies of Scales


  When growth in an industry results in lower long-run average costs
• Causes of External Economies of Scale

  • Cluster effect
  • Skilled labour
  • Transport links
  • Supportive legislation
• Skilled Labour


  Firms located in a particular region e.g. Silicon Valley encourage skilled labour to seek work there thus reducing recruiting and training costs
• Cluster Effect


  Firms located in a similar area can connect with more suppliers and attract more suppliers to the area thus reducing shipping costs
• Transport Links


  Improved transport links reduce geographical immobility, lower shipping costs and make it easier for firms to expand
• Supportive Legislation

  As an industry grows and gains regional importance it may gain greater political bargaining power so may receive tax cuts and subsidies