Economies of Scale

• Economies of scale


  A benefit of growth achieved by large companies, where the average cost of production falls as the scale of production rises
• The more units that are produced


  The cheaper it is to produce each one
• Types of economies of scale

  • Managerial
  • Purchasing
  • Financial
  • Technical
  • Risk Bearing
• Managerial economies of scale

  Larger firms can afford to employ more skilled workers in their field
• Purchasing economies of scale

  Firms get a discounted price for buying supplies in larger quantities
• Financial economies of scale

  The larger the firm, the less risky they are as they have a customer base and assets that can be sold off, allowing them to access cheaper sources of finance
• Technical economies of scale

  As a firm gets larger, it can invest in new technologies that makes production more efficient
• Risk Bearing economies of scale


  Larger firms can spread risk and can afford to make losses in market, because they could operate in different, more profitable markets
• Diseconomies of scale

  What occurs when a business becomes inefficient as it gets too big, leading to a rise in unit costs
• Types of diseconomies of scale


  • Communication
  • Coordination
  • Reduced motivation from staff
• Communication diseconomies of scale

  The more people involved in an organisation, the harder it is to communicate with them and with suppliers
• Coordination diseconomies of scale

  An increased number of resources can become difficult to coordinate
• Reduced motivation from staff diseconomies of scale

  Employees may feel overworked, stressed and feel like they aren't treated right in the business
• Ways businesses can grow to achieve economies of scale

  • Internal growth
  • External growth
• Internal growth

  Also known as organic growth, including franchising, opening new stores, e-commerce, and outsourcing
• Franchising

  Where one business gives another business or person the right to trade using its name, sell its products or provide its services, in exchange for a licence fee and profit share
• External growth

  Happens when a business grows by joining another business, through mergers or takeovers
• Merger


  Two businesses decide to become integrated under joint ownership
• Takeover


  One business buys another business