Economies and Diseconomies of Scale

Economies and Diseconomies of Scale

• Economies of scale are benefit in the form of lower long-run average costs that result from an increase in the scale of production
• Diseconomies of scale are the disadvantages that occur if the scale of production of the firm becomes too large.

Internal Economies of Scale

• Internal economies of scale are economies of scale that occur within the firm as a result of its growth. Examples include:
  • Purchasing economies of scale
    • Buying in bulk will often get you a discount per unit, e.g. buying tons of popcorn would probably be cheaper than buying 2kg at a time.
  • Selling economies of scale
    • A larger firm can make better use of sales and distribution facilities, e.g. hiring a huge HGV that’s twice the size of a lorry doesn’t cost twice as much.
  • Technical economies of scale
    • A larger firm would be able to buy more high-tech and efficient equipment
  • Managerial economies of scale
    • As a company gets bigger, it can afford to hire specialised staff, like buying accountants etc.
  • Financial economies of scale
    • Larger firms may find it easier to get bank loans, and would probably charge a lower rate of interest
  • Risk-bearing economies
    • As a company gets larger, they can produce a greater range of products. This aids them, as if one product suddenly becomes unpopular, and makes a loss, then the others will compensate for it

External Economies of Scale

• External economies of scale are economies of scale that result from the growth of an industry and benefit firms within the industry
  • g. if a country or area has a reputation for producing a good quality product, all the firms in the industry can benefit from this.

Internal Diseconomies of Scale

• Internal diseconomies of scale are diseconomies of scale experienced by a firm caused by its growth
  • For example, as a firm gets bigger, it can be hard to manage, as there is more to keep check on, and more levels of decision making, where conflicts may occur, and hence reacting to market situations may take longer.

External Diseconomies of Scale

• External diseconomies of scale are diseconomies of scale resulting from the growth of the industry, affecting firms within the industry.
  • g. if the industry for say, transport tourism gets bigger (planes), then there will be more planes flying, and hence negative externalities such as pollution will be more common.
  • External diseconomies of scale would increase the average cost curve (shift upwards)