3.3.3 Economies and diseconomies of scale

• What are economies of scale?

  The cost advantages that businesses experience as they increase production
• What are internal economies of scale?

  The cost-saving advantages that a company experiences as it expands 
• What are external economies of scale?

  The cost advantages that all firms in an industry can benefit from as the overall industry grows, rather than as a result of the firm's own expansion.
• What are the types of internal economies of scale?

  • Technical economies
  • Marketing economies
  • Managerial economies
  • Financial economies
  • Risk-bearing economies
  • Economies of scope
• What are technical economies of scale?

  Larger firms can invest in more efficient machinery or automate processes that reduce the cost per unit of output
• How do technical economies of scale work?

  • Large-scale businesses can afford to invest in expensive and specialist capital machinery
  • Improvements in production techniques and technology as the firm expands
• What are marketing economies of scale?

  Large firms can spread their marketing and advertising costs over a larger output, reducing the cost per unit
• What may marketing economies of scale benefit from?

  • Brand recognition, making marketing more efficient
• What are managerial economies of scale?

  Large firms can afford to hire specialised managers for different functions 
• What does specialisation lead to in terms of economies of scale?

  • Specialisation leads to better management and more efficient operations, reducing costs
• What are financial economies of scale?

  Larger firms generally have better access to financial markets and can borrow at lower interest rates
• What are risk-bearing economies of scale?

  Larger firms can diversify their operations and product lines, reducing their risk exposure
• What are economies of scope?

  Cost advantages that a firm experiences by producing a variety of products together, rather than specialising in just one
• When do economies of scope occur?

  • When producing multiple products is cheaper for a firm than producing each one separately, due to shared resources, processes, or expertise
• When do diseconomies of scale occur?

  When a company grows too large, leading to an increase in average costs per unit of production
• What are types of diseconomies of scale?

  • Managerial diseconomies of scale
  • Communication failure
  • Motivational diseconomies of scale
• What are managerial diseconomies of scale?

  When the firm gets too big, people lacking the right skills can get promoted and therefore make poor decisions adding to the costs of the firm
• What are communication failures?

  Large firms can have too many layers of management making communication and decision making longer and less effective
• What are motivational diseconomies of scale?

  As a firm starts to gain market share and increase production, it needs to adapt and introduce specialisation which makes the work less interesting. 
• How would overspecialisation affect diseconomies of scale?

  • Overspecialisation may make the work less interesting and affect the quality of the output
• What are external economies of scale?

  Occur when a whole industry grows larger and firms in that industry benefit from lower long average costs
• What are examples of external economies of scale?

  • Improvements in transport that benefit all firms in a particular industry
  • Skilled labour may be attracted to an area that gets a reputation for specialising in a particular service
  • New methods of production
• What are external diseconomies of scale?

  Occur when the growth of an industry or the economic environment as a whole leads to an increase in costs for all firms within that industry
• What are examples of external diseconomies of scale?

  • Higher costs if many firms want to locate in a particular region
  • Congestion could occur if a firm is located in a region which is growing rapidly
  • Demand for resources needed by that industry increases
• What is the minimum efficient scale?

  The output where the long-run average costs first reach a minimum