Economies and Diseconomies of Scale

1. Economies and Diseconomies of Scale

2. 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

3. Internal Economies Those Specifically related to the business itself eg:- Production Purchasing Marketing Financial Managerial External Economies Benefits the whole industry and not specific firms Skilled labour in the area Better road and rail networks Improves the reputation of the area Attracts other businesses Internal and External Economies

4. 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

5. 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

6. Some common diseconomies of scale: • Decision making • Managerial problems • Communication problems • Co-ordination/control problems • Staffing problems

7. Task: • 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. • Explain how Diseconomies of Scale could effect the Virgin Group?