Economies+and+Diseconomies+of+Scale

__Internal 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

External Economies of Scale

The benefits __all__ firms gain from the growth of the industry in one particular area
 * Reputation
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px; line-height: 1.5;">Skilled labour
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px; line-height: 1.5;">Infrastructure
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px; line-height: 1.5;">Support services
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px; line-height: 1.5;">Cooperation between firms

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">Q2 P207 Pearson Textbook