Economies of Scale

• Economies of scale


  A reduction in long-run average cost as output increases
• Long-run average cost curve is falling


  Firm is experiencing increasing returns to scale
• Long-run average cost curve is rising


  Firm is experiencing decreasing returns to scale
• Internal economies of scale

  Economies of scale that occur within a business and are within a business's control
• Types of internal economies of scale


  • Managerial
  • Technical
  • Purchasing
  • Marketing
  • Financial
  • Risk bearing
• Managerial economies of scale

  Employing specialist managers can boost productivity
• Technical economies of scale

  Employing specialist machinery or specializing workers can boost productivity
• Purchasing economies of scale

  Buying raw materials in bulk to negotiate unit discounts
• Marketing economies of scale

  Bulk buying advertising to negotiate better unit rates
• Financial economies of scale

  Negotiating lower interest rates on loans as the firm is larger and less risky
• Risk bearing economies of scale


  Spreading risk over a larger output range
• External economies of scale


  Economies of scale that occur outside the business but within the industry
• Types of external economies of scale

  • Better transport infrastructure
  • Closer component suppliers
  • Closer research and development firms
• Diseconomies of scale


  An increase in long-run average cost as output increases
• Causes of diseconomies of scale

  • Loss of control
  • Communication problems
  • Coordination problems
  • Motivation problems
• Loss of control


  Harder for managers to control a larger workforce, leading to reduced productivity
• Communication problems


  Difficulty spreading messages throughout a larger organization, leading to reduced productivity
• Coordination problems


  Difficulty coordinating different departments in a larger organization, leading to reduced productivity
• Motivation problems


  Workers feeling less valued in a larger organization, leading to reduced productivity