Ch17 - Economies and diseconomies of scale

• Economies of scale


  Occur when average costs fall as a firm expands
• Internal Economies of scale

  Cost benefits that an individual firm can enjoy when it expands
• Purchasing economies


  • Larger firms that buy lots of resources get cheaper rates
  • Suppliers offer discounts to firms that buy raw materials or components in bulk
  • Bulk buying (buying goods in large quantities, which is usually cheaper than buying in small quantities)
• Marketing economies


  • Some marketing costs such as TV advertisement are fixed, these costs can be spread over more units of output
• Technical economies


  • Larger factories are often more efficient than smaller ones
  • There can be more specialisation and more investment in machinery
• Financial economies


  • Large firms can get access to money more cheaply
  • Large firms can raise money by selling shares or put pressure when negotiating prices of loans
• Managerial economies


  • A large firm can employ specialists, efficiency is likely to improve and average costs will fall
• Risk-bearing economies


  • Larger firms are more likely to have wider product ranges and sell into a wide variety of markets, reducing business risk
  • E.g. Supermarkets have extended their product ranges to include household goods, consumer durables
• External economies of scale

  • Skilled labour: if an industry is concentrated in one area, there may be a build up of labour with the skills and work experience of that industry
  • Infrastructure: if an industry dominates a region, the roads, railways, ports buildings will be shaped to suit the industry's needs
  • Access to suppliers: An established industry in a region will encourage suppliers in that industry to set up close by
  • Similar business in the area: when firms in the same industry are located close to each other, they are likely to cooperate with each other
• Bureaucracy

  • Bureaucracy: larger businesses rely more on bureaucracy, resources wasted in administration, decision making maybe too slow, communication channels too long (a lot of procedures, lots of levels)
• Economies and diseconomies of scale curve

  A) diseconomies of scale

  B) economies of scale

  C) average cost

  
• Internal economies of scale(factors) 


  • market economies
  • technical economies
  • financial economies
  • managerial economies
  • risk-bearing economies
• External economies of scale (factors)

  
  

  • Skilled labour
  • infrastructure
  • access to suppliers
  • similar businesses in one area
• External economies of scale

  • cost benefits that all firms in the industry can enjoy when the industry expands
• Diseconomies of scale

  • average costs rise when a firm becomes too big (企業擴充太快，cannot enjoy benefits)
• Communication problems


  • Communication problems: Large organisations employ workers spread all over the world who speak different languages and have different cultures, and have timing differences between different global operations
• Lack of control


  • Lack of control: Thousands of employees or plants all over the world can make running a big organization demanding, need for supervision and more layers of management, distance between top management and workers to the bottom organization can lead to lack of understanding
• Diseconomies of scale:


  • Bureaucracy
  • communication problem
  • lack of control
  • distance between top management ad workers to the bottom of the organization