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Economies and diseconomies of scale
Transcript of Economies and diseconomies of scale
Specialisation of the work force in larger businesses: splits production into different tasks to improve productivity (division of labour).
External economies of scale Diseconomies of scale The effect of economies of scale reduces the cost of production as output increases. Lower costs= improvements in product efficiency that can be passed on to consumers meaning lower prices.
This gives businesses a comparative advantage in the market= high profits, lower prices.
A law of increased dimensions: linked to the cubic law in which if you double the size of a lorry taking bread to a supermarket, you will be able to take more than double the amount of break, therefore leading to lower costs for each loaf of bread. Managerial economies of scale: (Form of division of labour) This justifies having specialist senior managers in particular disciplines. Better management and investment raises productivity and reduces unit cost. Financial economies of scale: Larger firms are more ‘credit worthy’ and are given access to funds with a lower rate of interest. On the other hand smaller businesses have to deal with the high rates of interest on their loans and overdraft, as they are more ‘risky’. Another way larger businesses can raise financial capital cheaply as through being quoted on the stock market it can issue shares.
Furthermore the firm has high buying power, it can bulk buy raw materials at negotiated discounted prices (e.g. supermarkets purchasing supplies from farmers and wine growers.)
These occur outside a business of firm but within an industry. When an industries ‘scope’ of operations expand due to an external source it leads to external economies of scale. E.g. creation of a better transportation network (more fuel efficient lorries), that lead to cost reductions in that industry, external economies of scale are achieved.
A firm may eventually experience a rise in average costs; this is caused by diseconomies of scale. These may arise from:
1. Control Monitoring: monitoring the productivity and quality of output from thousands of employees is difficult and costly. 2. Coordination: Coordinating complicated production processes across several plants in different places/countries can be difficult. Achieving sufficient flow of information in a large business is expensive, as well as managing contracts with suppliers in different points in the industry supply chain. 3. Cooperation: Workers may feel alienated in a large business and therefore lose motivation. If they don’t feel like an important part of the business their productivity may fall leading to more waste and higher costs. Avoiding diseconomies of scale