Economies of Scale

• Economies of scale


  The cost savings that a firm receives from increasing in size or productive capacity
• Types of economies of scale

  • Internal economies of scale
  • External economies of scale
• Internal economies of scale

  • The benefits the firms receive from using its own resources
• Technical or Indivisibilities


  • The ability of larger firms to make use of technology which is not available to smaller firms
• Marketing economy


  • When a firm expands to the point where it can purchase in bulk and secure reasonable discounts
• Organizational or Managerial Economies of Scale

  • Large firms are able to employ an efficient organisational structure with departments, enabling more effective management and supervision which in turn results in improved productivity and reduces the cost of each unit of output
• Financial Economies of Scale

  • Financing costs would be reduced as larger firms have greater collateral, allowing them to access greater loans at lower interest rates
• External economies of scale

  • The growth experienced by a firm is due to developments taking place in the industry as a whole
• Cluster effect


  • If firms locate in a similar area, it makes it more efficient for suppliers to meet a larger base of purchasers
• Skilled labour


  • If similar firms locate in a particular region it will encourage skilled labour to seek work in this area
• Transport links


  • If mining becomes concentrated in a certain area, there will be better transport links for shipping the goods to the market
• Supportive legislation


  • If an industry grows and becomes important to a region, it may gain greater political bargaining power and local politicians will seek to gain favourable terms for their local industry
• Diseconomies of scale


  When the firm becomes too large which results in inefficiencies and increases the average cost of production
• Lost managerial control


  • The company may grow too large which makes communication more complex, including various levels of management and supervision may be less efficient
• Poor Industrial Relations


  • The relationship that exists between workers and management, if poor then industrial actions such as strikes and sickouts may happen
• Overspecialisation


  • When a person does a job repeatedly to the point where it becomes boring and the motivation has decreased, the level and quality of output will decrease