Economies and Diseconomies of Scale Economies of Scale

Economies and Diseconomies of Scale

Economies of Scale o As businesses grow – costs of production decrease o Bigger businesses gain some advantages over smaller businesses through Economies of Scale o There are two types of Economies of Scale: n n Internal Economies External Economies

Internal and External Economies Internal Economies o 1. 2. 3. 4. 5. External Economies Those Specifically related to the business itself eg: - o Benefits the whole industry and Production Purchasing Marketing Financial Managerial 1. Skilled labour in the area not specific firms 2. Better road and rail networks 3. Improves the reputation of the area 4. Attracts other businesses

Example: o 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

Diseconomies of Scale o There are limits to the amount a business can grow o If businesses grow to large they start to suffer from Diseconomies of Scale o These diseconomies happen because the larger the business the more difficult it becomes to manage

Some common diseconomies of scale: 1. Decision making 2. Managerial problems 3. Communication problems 4. Co-ordination/control problems 5. Staffing problems

Task: 1. 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. 2. Explain how Diseconomies of Scale could effect the Virgin Group?