Economies and diseconomies of scale
Economies of scale
- Economies of scale are cost savings as a business grows — the average cost per unit falls as output rises.
- Types include purchasing (bulk buying), technical (big machines), financial (cheaper loans), managerial (specialists), marketing (spread cost over more units).
Practice
Economies of scale mean that, as output rises, the average cost per unit:
Economies of scale lower the average cost per unit as the firm grows (e.g. bulk buying).
Practice
Buying materials in bulk at a lower price per unit is an example of:
Bulk buying is a purchasing economy of scale.
Diseconomies of scale
- If a firm grows too big, average cost starts to rise again. Causes:
- communication becomes slow and unclear,
- coordinating many departments is hard,
- workers feel unimportant and lose motivation.
Practice
A common cause of diseconomies of scale is:
When a firm grows too big, slow communication, hard coordination and lower motivation raise average costs.
You've got it
Key idea
- economies of scale: average cost falls as the firm grows (bulk buying, big machines, cheaper loans)
- diseconomies of scale: average cost rises if it grows too big (poor communication, coordination, motivation)
- the average-cost curve falls then rises as output increases