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 and External Economies 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

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 Anil Dhirubhai Ambani Group?