3.2.3+Scale+of+Production

= Economies of Scale =

These are the factors that cause average costs (cost per unit) to be lower in large-scale operations than in small-scale ones. In other words, as output grows, cost per unit falls. This can also be explained by increasing returns to scale. This is when output increases at a faster rate than inputs. Note that this is when a company grows by increasing its use of all factors of production. Some examples of economies of scale are shown below:   · financial economies – cheaper borrowing as the firm gets bigger and has more assets and collateral · technical economies – the use of automated equipment where it is more cost-effective than labour · managerial economies – can employ specialists, workers whose skills exactly match the job requirements · purchasing economies – these are the benefits of bulk buying · risk-bearing economies – the growth of the firm means less risk as it can diversify into different areas

=Diseconomies of Scale=

 These are the factors causing higher costs per unit when the scale of output is very large i.e. causes of inefficiency in large organisations. Examples are:  · communication – a long chain of command might mean poor communication and little feedback · co-ordination – large businesses means a high degree of delegation but empowering managers might mean departments pull in different directions · controlling – this is difficult for the reasons outlined above · motivating – individuals can get lost in the crowd

<span style="background-color: #ffffff; color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 15px;">Now read P97-99 and make additional notes if required. Copy the revision summary diagram on P97.