Please enable JavaScript.
Coggle requires JavaScript to display documents.
Economies and diseconomies of scale - Coggle Diagram
Economies and diseconomies of scale
Economies of scale
As a business grows, it is able to increases its scale of output which generates efficiencies that lower its average costs (AC) of production, reducing the cost of production
Result on lower unit cost
Internal and external
Internal economies of scales
purchesing economies
The firm buys raw more raw materials which allows the firm to buy the raw materials in bulk, this will reduce the avarage cost
managearial economy
The business is capable to hire specialist managers which are more efficient and decrease the cost of producing each individual unit
The business has a greater range of suppliers, meaning they can choose the cheaper supplier
External economies of scale
External economies of scale lower average costs for individual businesses when the market as a whole grows
Improved infrastructure
A growing industry that employs many people is in a good position to persuade local authorities to improve transport and communications structure to meet its needs
This will result on more efficient distribution
better skilled workforce
A groth in the industry means there is more employees and more people who are specialised
This results on less training required
More efficeint workers
Quicker productivity
https://cdn.savemyexams.com/cdn-cgi/image/f=auto,width=1920/https://cdn.savemyexams.com/uploads/2022/11/3-5-4-economies-and-diseconomies-of-scale.png
1.With low levels of output the unit cost is high
2.As the firm exands it can take advantage of economies of scale and decrease unit cost
The business reaches a level of output where unit cost is minimised
Beyond this point, diseconomies of scale happens and avarage cost increases
Diseconomies of scale
As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase
Why does diseconomies of scales happen
Increased bureaucracy
larger business are more complicated to organise
This means the business will need specialised managers to organise all the production process
Lack of commitment from employees
Workers feel less valued in ñlarger companies leading to demotivation
Poor communication & coordination
As the business gets bigger more managers and employees will join the business which means that the chain of command will lengthen and communication willl be slower
Communication becomes slower and mistakes may be made, leading to worsening efficiency
A business with diseconomies of scale might want to change its organisational structure to improve communication and increase efficiency