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ECONOMIES AND DISECONOMIES OF SCALE - Coggle Diagram
ECONOMIES AND DISECONOMIES OF SCALE
Short Run Average Cost
tent to fall as output increases due to fixed cists being spread over more units of output
However, as more and more is produced with the same fixed assets, eventually inefficiency will kick in (explained by the law of diminishing returns)
As output increases further, SRAC starts increasing due to the law of diminishing marginal returns
As output increases, SRAC falls due to the spreading of costs
U-shaped up to the optimum output level, as average costs are falling
Long Run Average Cost
The scale of production can be increased (factories and offices can be used, or more plant and machinery)
Larger the scale of production, the lower the average cost (economies of scale)
After the minimum efficient scale, larger the scale of production the higher average cost will be (diseconomies of scale)
Economies of scale
long-run average cost reduce as a result of an increase in output
Diseconomies of scale
Internal
Communication problems
with more people involved in he business, it can be difficult to make sure messages get to the right people at the right time
Co-ordination and control problems
controlling all the different activities is more difficult, as is making sure everyone is working towards the same goal
Motivation
as a firm gets bigger it can become much harder to make sure everyone feels a part of the organisation
External
Overcrowding in industrial area (price of land, labour, services and material)
Economies of scale
Internal
Technology
as a firm expands it may be able to adopt different production techniques to reduce the unit cost of production (replacing people with machinery)
Specialisation
as firms get bigger they are able to employ people to specialise in different areas of the organisation
Purchasing power
as firms get bigger they need to buy more suppliers (negotiations)
Selling
a large firm makes more use of sales and distribution facilities than a small one (does not cost twice as much to use a HGV that is twice the size of a lorry)
Financial
large firms usually find it cheaper and easier to raise finance than small firms (more stable)
External
Labour
the concentration of firms may lead to the build up of a labour force equipped with the skills required by the industry
Commercial services
a wide range of commercial and support services can be offered (banking, marketing, waste disposal)
Co-operation
firms located in the same region might join forces to fund a research and development center for the industry
Distintegration
when an industry is concentrated in an rea firms might specialise in the production of one component and then transport it to a main assembly point
minimum efficient scale
when a firm has built a factory which minimises long-run average costs