Economies and Diseconomies of Scale

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Economies of Scale: The advantages that an organisation gains due to an increase in size. These cause an increase in productive efficiency (a decrease in the average cost per unit of production).

Diseconomies of Scale: The disadvantages that an organisation experiences due to an increase in size. These cause a decrease in productive efficiency (an increase in the average cost per unit of production).

Internal Economies Of Scale (often Abbreviated to economies of scale):

Technical Economies:

- Modern Equipment that will improve efficiency can be installed. This should lower unit costs and improve the quality and reliability of the product or service.

- Mass Production (flow) techniques can be employed to improve productivity.

- Highly trained technicians can be employed to improve the reliability of the production process.

-Large Scale Transportation can reduce distribution costs per unit.

- The purchase of computer systems can improve efficiency in both production and administration.

- Improvements in communication systems using new technology can enhance customer service and the working environment, improving the company's operations and its reputation.

Specialisation Economies:

- Large firms can afford to employ specialists with particular skills. In smaller organisations, staff tend to take on a wider variety of tasks, and specialist skills, when needed, are bought from the outside at a relatively high price.

- Production techniques can be adapted to encourage division of labour (specialisation) in large firms.

- A small firm is unlikely to be able to pay a high enough salary to attract the best staff, so larger firms should be more efficient. Training to improve specialist skills is also easier in large firms.

- If staff are able to specialise, they are likely to become even more skilled in their role, again increasing the efficiency of the firm.

Purchasing Economies:

- Large firms can buy in bulk. This reduces costs because suppliers can produce in large quantities and thus lower their own costs.

-Suppliers may offer greater discounts in order to guarantee a contract with a larger customer.

Marketing Economies:

Large firms use more expensive media that reach customers in a more persuasive way. This can increase the effectiveness of the advertising and reduce unit costs. Large…


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