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Economies and Diseconomies of Scale
- Economies of Scale
- ECONOMIES OF SCALE=
where an increase in the scale of
production leads to reductions in
average total costs (ATC) for firms
- They are the cost advantages that a business can
exploit by expanding their scale of production
- They give a business a competitive advantage in the
market, leading to lower prices and/or higher profits
- They are the cost advantages that a business can
exploit by expanding their scale of production
- Internal Economies of Scale
- (Arise from the
growth of the
firm itself)
- Examples
- Technical Economies of Scale
- Specialisation
- Occurs by splitting complex production processes
into separate tasks to boost productivity
- e.g. division of labour in mass production of cars
- Occurs by splitting complex production processes
into separate tasks to boost productivity
- The law of increased dimentions
- linked with the cubic law where doubling
the height and width of a tanker or building
leads to a more than proportionate
increase in the cubic capacity
- e.g. important in
distribution and transport
industries as well as in
travel and leisure
- linked with the cubic law where doubling
the height and width of a tanker or building
leads to a more than proportionate
increase in the cubic capacity
- Investing in machinery
- large-scale businesses can
afford to invest in expensive,
specialist capital machinery
- e.g. a national newspaper can invest in
large-scale printing presses that increase
productivirt and reduce unit costs. It wouldn't
be viable or cost-efficient for the producers of
a church newsletter to buy this technology
- large-scale businesses can
afford to invest in expensive,
specialist capital machinery
- Specialisation
- Marketing Economies of Scale
- large firms can spread
their advertising and
marketing budget over
a large output
- large firms can spread
their advertising and
marketing budget over
a large output
- Managerial Economies of Scale
- a form of the division of labour; large firms can justify
having specialist senior managers in particular disciplines
such as company law and intellectual property.
- Better management and investment
in human resources raises
productivity and thus reduces unit
cost
- Better management and investment
in human resources raises
productivity and thus reduces unit
cost
- a form of the division of labour; large firms can justify
having specialist senior managers in particular disciplines
such as company law and intellectual property.
- Financial Economies of Scale
- larger firms are rated by banks as 'credit worthy' sp are given
access to credit facilities with more favourable rates of
borrowing. Conversely, smaller firms often face higher rates of
interest on their overdrafts and loans, being judged more 'risky'.
- Businesses on the stock market can normally raise extra
financial capital more cheaply through the issue of shares.
- If the firm has strong buying power it can purchase its
raw materials in bulk at negotiated discounted prices
- If the firm has strong buying power it can purchase its
raw materials in bulk at negotiated discounted prices
- Businesses on the stock market can normally raise extra
financial capital more cheaply through the issue of shares.
- e.g. the ability of electricity
generators to secure lower prices
when negotiatong coal and gas
supply contracts
- e.g. major supermarkets
having significant power when
purchasing supplies from
farmers and wine growers
- larger firms are rated by banks as 'credit worthy' sp are given
access to credit facilities with more favourable rates of
borrowing. Conversely, smaller firms often face higher rates of
interest on their overdrafts and loans, being judged more 'risky'.
- Network Economies of Scale
- the extra cost of adding one more user to a network is close to
nothing but the resulting benefits may be huge because each
new user to the network can then interact and trade with all of
the existing members or parts of the network
- as networks and
services are more
widely used if they
become more valuable
to the business that
provides them
- as networks and
services are more
widely used if they
become more valuable
to the business that
provides them
- e.g. the rapid expansion
of e-commerce
- can be found in
areas such as online
auctions and air
transport networks
- the extra cost of adding one more user to a network is close to
nothing but the resulting benefits may be huge because each
new user to the network can then interact and trade with all of
the existing members or parts of the network
- Technical Economies of Scale
- (Arise from the
growth of the
firm itself)
- External Economies of Scale
- (Occur outside of a firm
but within an industry)
- When an industry's scope of operations expand, external economies of scale are achieved
- e.g. this might happen due to the creation of a better
transportation network that might led to cost
reductions for a company working within that industry
- e.g. the development of research and development
facilities in universities that several local businesses
can benefit from lead to external economies of scale
- e.g. the relocation of component suppliers and other support businesses close to the main centre of
manufacturing can also lead to an external cost saving. As has been done in the Sunderland Nissan Car Factory,
inside the same building, smaller businesses supplying different parts for the car can rent out the space and
mean Nissan don't have to pay for long traveling costs
- e.g. this might happen due to the creation of a better
transportation network that might led to cost
reductions for a company working within that industry
- (Occur outside of a firm
but within an industry)
- ECONOMIES OF SCALE=
where an increase in the scale of
production leads to reductions in
average total costs (ATC) for firms
- Diseconomies of Scale
- DISECONOMIES OF SCALE= where
an increase in the scale of production
leads to an increase in the average
total costs (ATC) for firms
- Can arise from a lack of...
- CONTROL
- Control monitoring productivity and quality of output from
thousands of employees in big corporations is difficult and costly
- Control monitoring productivity and quality of output from
thousands of employees in big corporations is difficult and costly
- COORDINATION
- Can be difficult to coordinate complicated
production processes across several plants in
different locations and different countries. Achieving
efficient flows of information in large firms is
expensive, as is the cost of managing supply
contracts with hundreds of different suppliers at
different points in an industry's supply chain
- Can be difficult to coordinate complicated
production processes across several plants in
different locations and different countries. Achieving
efficient flows of information in large firms is
expensive, as is the cost of managing supply
contracts with hundreds of different suppliers at
different points in an industry's supply chain
- COOPERATION
- Workers in large firms may feel a
sense of alienation subsequently
causing a lack of motivation
- Productivity of labour may fall if people don't feel
an integral part of the business leading to
wastage of factor inputs and higher costs
- Workers in large firms may feel a
sense of alienation subsequently
causing a lack of motivation
- CONTROL
- Avoiding
diseconomies
of scale...
- developments in human resource
management (increases
cooperation), a human resources
manager can improve recruitment
procedures, training, promotion,
retention and support of workers
- performance-related pay schemes (provide incentives)
- Out-source (transfer portions of work) to specialist firms (outside suppliers)
overcomes problems of control and coordination
- developments in human resource
management (increases
cooperation), a human resources
manager can improve recruitment
procedures, training, promotion,
retention and support of workers
- DISECONOMIES OF SCALE= where
an increase in the scale of production
leads to an increase in the average
total costs (ATC) for firms
- Competition and Monopolies
- COMPETITION= a market situation in which
there are a large number of buyers and sellers
- MONOPOLY= a market structure
dominated by a single seller of a good
- A high level of competition is necessary for markets to function
well. An extremely competitive market situation is called 'perfect
competition'.
- Advantages of competitive markets...
- lead to productive efficiency, with goods produced at minimum possible cost per unit
- Firms will produce what the consumer want, so there will be consumer sovereignty, or they wont survive in the market
- Firms will have to
charge a price just a
little about the cost of
production
- lead to productive efficiency, with goods produced at minimum possible cost per unit
- Reasons why we might not expect many markets in
developed economies to be highly competitive...
- The larger a firm becomes, the lower the cost of producing a unit of output is. In many
industries there are considerable economies of scale to exploit, so firms have to be large to
benefit fully. This may mean there is only room for a few firms or even just one, a
monopoly, to exist.
- The profit motive motivates firms to compete away other firms in the market, legally or otherwise
- profits made from being able to exploit economies of scale could be invested in research and development
to make new products that consumers prefer to those of rival firms, further eliminating competition
- profits made from being able to exploit economies of scale could be invested in research and development
to make new products that consumers prefer to those of rival firms, further eliminating competition
- The larger a firm becomes, the lower the cost of producing a unit of output is. In many
industries there are considerable economies of scale to exploit, so firms have to be large to
benefit fully. This may mean there is only room for a few firms or even just one, a
monopoly, to exist.
- COMPETITION= a market situation in which
there are a large number of buyers and sellers
- The average cost curve illustrating
economies and diseconomies of scale
- Q1 to Q2 is where there are economies of scale
- Q2 is when a firm is productively efficient
- Q2 to Q3 is where there are diseconomies of scale
- Q2 to Q3 is where there are diseconomies of scale
- Q2 is when a firm is productively efficient
- As output
increases firms
are getting larger
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