Economies and diseconomies of scale

Economies and diseconomies of scale

1. Economies and diseconomies of scale

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

3. Financial economies Lenders Banks Less risk Easier to borrow money Lower interest rate

4. Managerial economies Specialist managers for the different functional areas. E.g.. Marketing, finance, operations, human resources. Improve quality of business decisions. Fewer mistakes

5. Marketing economies Total marketing costs rise as a business grows. Sales output increases at a faster rate.

6. Purchasing economies Greater quantities of raw materials, goods Discounts ‘bulk-buying economies’

7. Technical economies CAM- Computer aided manufacturing The latest technology expensive

8. Activity 16.5 pg. 220

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

10. Poor communication Managers- employees Not direct

11. Demotivation of workers no longer feel valued High labour turnover Poor quality Fall in productivity

12. Poor control Number of departments, products, production units increase

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