Transcript Economies and Diseconomies of Scale

Economies and
Diseconomies of
Scale
Economies of Scale

As businesses grow – costs of production decrease

Bigger businesses gain some advantages over smaller
businesses through Economies of Scale

There are two types of Economies of Scale:


Internal Economies
External Economies
Internal and External
Economies
Internal Economies

1.
2.
3.
4.
5.
External Economies
Those Specifically related to
the business itself eg:-
 Benefits the whole industry and
Production
Purchasing
Marketing
Financial
Managerial
1. Skilled labour in the area
not specific firms
2. Better road and rail networks
3. Improves the reputation of the
area
4. Attracts other businesses
Example:
 Daimler Chrysler own the following brands:
Purchasing economies of scale can be achieved by bulk
buying parts that can be used across all brands such as
Wiper Blades
Diseconomies of Scale
 There are limits to the amount a
business can grow
 If businesses grow to large they start to
suffer from Diseconomies of Scale
 These diseconomies happen because
the larger the business the more difficult
it becomes to manage
Some common diseconomies
of scale:
1.
Decision making
2.
Managerial problems
3.
Communication problems
4.
Co-ordination/control problems
5.
Staffing problems
Task:
1.
Peter, a sole trader who owns a grocery shop, is in
trouble because of a supermarket which has just
opened. The supermarket benefits from economies of
scale. Select and explain (in detail) how four of these
economies will benefit the supermarket.
2.
Explain how Diseconomies of Scale could effect the
Virgin Group?