ECONOMIES AND DISECONOMIES OF SCALE

The reduction in average costs as a result of increasing the scale of operations.

Financial economies

Lenders Banks Less risk Easier to borrow money Lower interest rate

Managerial economies

Specialist managers for the different functional areas.

E.g.. Marketing, finance, operations, human resources.

Improve quality of business decisions.

Fewer mistakes

Marketing economies

Total marketing costs rise as a business grows.

Sales output increases at a faster rate.

Purchasing economies

Greater quantities of raw materials, goods

Discounts

‘bulk-buying economies’

Technical economies

CAM- Computer aided manufacturing

The latest technology

expensive

Activity 16.5 pg. 220

Diseconomies of scale

Factors that cause average costs to rise as the scale of operations increases.

Poor communication

Managers- employees

Not direct

Demotivation of workers

no longer feel valued High labour turnover Poor quality Fall in productivity

Poor control

Number of departments, products, production units

increase

The importance of economies and diseconomies of scale. Case study pg. 222