Economies of Scale and Diseconomies of Scale
(Thalea 12L)
Economies of Scale
The lower average cost of production as a firm operates on a larger scale due to an improvement in productive efficiency.
Economics of scale can help the business to gain a competitive cost advantage because lower average costs mean a combination of lower prices being charged to customers and higher profit margin earned on each unit sold.
Average cost: Economies scale that occurs inside the firm and are within its control are known as Internal Economies of scale.
Those that occur within the industry and are largely beyond an individual firm's control are known as external economies of scale.
Internal Economies of Scale
By operating on larger scale, a business can reduce its average cost of production due to any combination of the factors:
Technical economies
Financial economies
Managerial ecnomies
Specialisation economies
Marketing economies
Purchasing economies
Risk-bearing economies
External Economies of Scale
Are cost saving benefits of large scale operations arising from outside the business due to its favourable location or general growth in the industry.
Diseconomies of Scale
Are the result of higher unit cost as a firm continues to increase in size, e.g the business becomes outsized and inefficient so average cost begin to rise.
External Diseconomies of Scale
Refers to an increase in the average cost of production as a firm grows due to factors beyond its control.
E.g. Problems that affect the whole industry, often because there are too many firms. Average costs of production increase for all businesses in the industry.