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Economies and Dis-economies of Scale - Coggle Diagram
Economies and Dis-economies of Scale
Economies of Scale:
The lower average costs of production as a firm operates on a larger scale due to an improvement in productive efficiency.
INTERNAL
Technical Economies
Large firms can use sophisticated machinery and technology to mass produce the products. For example, Phillips in Shenzhen that produces complete audio systems in a matter of seconds, reducing the average cost of production.
Financial Economies
Large firms can borrow massive amount of money at lower rates of interest as they are less risky to financial lenders, compared to smaller businesses.
Managerial Economies
A business would hire specialist managers for each division to increase and maximize productivity in the workplace.
Specialization Economies
Companies such as vehicles acquire and hire specialists such as designers, production staff, engineers, and marketers to increase greater productivity.
Marketing Economies
Large firms usually benefit by selling products in bunches, thus benefiting from reduced time and transaction cost.
Purchasing Economies
Large firms can lower their average costs by buying their resources in bunches/bulks. Being big in business means that as the business orders more resources, a bigger discount would be given, thus reducing the average cost of the resources.
Risk-bearing Economies
Conglomerates can spread their average cost, such as researching and advertising across a wider range of operations. However, thus economy of scale only works for conglomerates.
EXTERNAL
Technological Progress
Increases the productivity of the industry, such as the occurrence of internet that increases productivity such as e-commerce.
Skilled Labour
The area might be filled with skilled workers in a particular area, thus increasing the work quality and the productivity of the company itself.
Improved Transaction Networks
Customers tend to visit accessible stores rather than further stores, thus congestion increases business costs whilst reducing revenues.
Regional Specialization
A particular location might be known around the world as a trustworthy place to buy certain goods, such as China for technology, where people usually buy phones, laptops, etc.
Dis-economies of Scale
: The result of higher unit costs as a firm continues to get bigger , thus resulting the business to be outsized and inefficient, therefore average costs rises.
INTERNAL
Communication Problems
As a business grows bigger, the communication from one branch of the business to the other would be harder, thus causing problems, which could lead to major problems throughout the business
Poorer Working Relationships
With a larger workforce, managers and high-positioned workers would feel more distant with lower positioned workers, thus resulting a poor working relationship with no sense of respect and solidarity in the workplace from the managers to the regular employees.
Disadvantages of Specialization
Workers could be bored as they are performing the same tasks repetitively. With a larger and more workforce, workers might also be caught off-guard and slacking, which would lead to lower production efficiency and increases the average costs.
The Amount of Bureaucracy
As a business grows bigger, more legal papers would be needed, thus decision making would be delayed and prolonged for the foreseeable future, therefore reducing the average costs as it takes more time.
Complacency
Being a large and the most dominant business in the industry might also be a weak link for the business, as people and workers would be satisfied too easily, thus reducing the mentality and productivity in the workplace.
EXTERNAL
Too many business residing and operating in the area would result in the area becoming more scarce, thereby increasing market rents. The high demand of business operating in relatively expensive locations such as New York and Hong Kong would decrease the profit as the rent is always rising.
Business should be able to cover and pay higher wages to employees and workers, as they have a greater range of choices. This would raise the average cost, thus resulting a dis-economy of scale.
Example
Supermarkets, such as Walmart and Tesco, can benefit from economies of scale because they can buy food in bulk and get lower average costs. If you had a delivery of just 100 cartons of milk the average cost is quite high. The marginal cost of delivering 10,000 cartons is quite low.
To produce tap water, water companies in Indonesia, such as Palyja and PAM had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, since they distribute water to over 25 million households, it brings the average cost down.
Another economy of scale is in the production of a complex item such as a vehicles company, Honda, Toyota, and many others. The production process involves many different complex stages. Therefore to produce a car you should split up the process and have workers specialise in producing a certain part. e.g. a worker may become highly specialised in the design of a car; another in testing e.t.c. Specialisation requires less training of workers and a more efficient production process