Size of the organisation will directly inlfuence its ability to operate efficiently, when operating at its most efficient it is known as its optimum output.
Before a firm reaches its optimum output it will be benefitting from economies of scale as it grows, but once optimum output is reached and exceeded into further growth it will start to cause problems: diseconomies of scale.
Economies of scale: the benefits enjoyed by a firm as a result of operating on a large scale, leading to a fall in average costs. It gives the business competitive advantage which can act as a barrier to smaller firms who cannot manage to compete
- Purchasing economies: benefit of buying on a large scale leading to lower average costs from suppliers. Refers to the ability of the business to buy in bulkand negotiate better terms with suppliers
- Technical economies: ability of larger firms to buy technically advanced equipment and spread the cost over a large number of pruducts so that the average cost is lower. The ability to invest in such equipment will let them operate more efficiently
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