Economies and Diseconomies of Scale 

Economies of scale 

As a business grows, it can experience economies of scale. This is when the average unit cost of a product falls. 

Internal Economies of Scale 

• As a business grows in scale, its costs will fall due to internal economies of scale. 
• An ability to produce units of output more cheaply. 

Types of Internal Economies of Scale 

• Production / Technical Economies 
  • Larger firms can use computers / technology to replace workers on a production line ● Mass production lowers cost per unit 
  • Large scale producers can employ techniques that are unable to be used by a small scale producer. 
  • Able to transport bulk materials.
• Purchasing / Marketing Economies 
  • Advertising costs can be spread across products 
  • Large businesses can employ specialist staff 
  • Bulk buying – if you buy more unit cost falls 
• Financial Economies 
  • Larger firms have better lending terms and lower rates of interest 
  • Easier for large firms to raise capital. 
  • Risk is spread over more products. 
  • Greater potential finance from retained profits. 
  • Administration costs can be divided amongst more products 
• Managerial Economies 
  • More specialised management can be employed, this increases the efficiency of the business decreasing the costs 
• Risk-bearing Economies 
  • Large firms are more likely to take risks with new products as they have more products to spread the risk over 

External Economies of Scale 

Those economies of scale are shared by a number of businesses in the same industry in a particular area. These are advantages gained for the whole industry, not just for individual businesses. Examples of External Economies 

• As businesses grow within an area, specialist skills begin to develop. 
• Skilled labour in the area – local colleges may begin to run specialist courses. 
• Being close to other similar businesses who can work together with each other. 
• Having specialist supplies and support services nearby. 
• Reputation 

Diseconomies of scale 

Diseconomies of scale occur for several reasons, but all as a result of the difficulties of managing a larger workforce. 

● Bureaucracy 

Large businesses rely more on bureaucracy. 

● Poor communication

As the business expands, communicating between different departments and along the chain of command becomes more difficult. There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This may result in workers having less clear instructions from management about what they are supposed to do when. 

● Lack of motivation 

Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging. This can lead to lower employee motivation with damaging consequences for output and quality. The main result of poor employee motivation is falling 

productivity levels and an increase in average labour costs per unit. 

● Loss of control and coordination 

It is harder to ensure that all workers are working for the same overall goal as the business grows. It is more difficult for managers to supervise their subordinates and check that everyone is working together effectively, as the spans of control have widened. 

Other Limit To Growth 

➢ Lack of Finance 

➢ Nature of the Market 

➢ Lack of Managerial skill 

➢ Lack of motivation