economies and diseconomies of scale

• economies of scale: a reduction in long run average costs as output increases
• types of economies of scale: risk-bearing, financial, managerial, technical, marketing and purchasing
• risk-bearing: opportunity cost is spread over a large output due to diversification into different product areas. Larger firms are able to absorb failure costs into other aspects of the business
• financial: lower rate of interest due to lower risk and reputation of success, also, businesses on the stock market can access financial capital more easily
• managerial: division of labour and specialisation helps increase productivity due to inc. investment in human capital. Leads to better decision making, expertise and experience
• technical: specialised or automated equipment helps to inc. speed of production and minimise errors, or may involve the law of increased dimensions
• purchasing: ability to buy raw materials in bulk and bargain lower prices as large firms are more crucial investors of money for other companies
• external economies of scale: occur within an industry or geographical location
• external economies of scale: improvement of infrastructure or transport, suppliers or research and development teams may move closer
• improvements in transport reduces the costs of trading and inc. the supply of human capital
• Examples of external economies of scale: Silicon Valley (technology), west midlands (automotive), Cambridge and Oxford (science and research), London (finance)
• diseconomies of scale: an increase in long run average costs as output increases
• causes of diseconomies of scale: control and communication of workforce, coordination and motivation
• Control: control of the workforce becomes more difficult as it grows meaning productivity may decrease
• communication: becomes more difficult as the company grows meaning time may be wasted
• coordination: different elements of the workforce may not work efficiently together
• motivation: as the firm grows, each individual worker may feel less valued
• Long run average costs curve: shows the minimum efficient scale of production and the output of economies and diseconomies of scale

  
• economies of scale - the cost advantage of production on a large scale
• internal economies of scale involve changes within a firm
• Marketing economies of scale - advertising is usually a fixed cost, however, if this is spread over more units, the cost per unit is lower. Larger firms also benefit from brand awareness and will be more trusted by consumers
• external economies of scale involve changes outside of a firm
• local collages may Strat to offer sources needed by local companies and employers, reducing a businesses training costs
• suppliers may also decide to locate in the same area to reduce transport costs of supplies and human capital
• firms may aim to gain bigger market shares by producing products at the lowest possible costs - leading to monopoly power in a market
• firms can also encounter diseconomies of scale, where average costs rise as output rises
• internal diseconomies of scale 


  wastage and loss due to bigger premises or more workers, communication may be more difficult, managers may have less control or supervision of workers, workers may become less motivated and interested due to large workforces
• external economies of scale 


  the price of raw materials may increase as demand becomes greater and if local supplies of raw materials aren't sufficient, companies may have to search further afield for goods
• firms with huge economies of scale most likely have high fixed costs but low variable costs
• external economies of scale - infrastructure, knowledge and labour pool and supplier networks
• infrastructure - shared infrastructure, such as transport, utilities and specialised services
• knowledge and labour pool - a concentration of skilled workers that are industry specific and knowledge sharing
• supplier networks - well-established networks of suppliers providing specialised components