Economics IGCSE Edexcel - Economics and Diseconomies of scale

Economies of scale : the advantages gained by a large firm.

Internal Economies of Scale: benefits of a large firm.

1. Purchasing- big firms can buy rAw materials in bulk which decreases bulk.
2. Marketing- it's more cost effective for large firms to advertise.
3. Technical- large firms can take more advantage of advanced production machinery, IT and software.
4. Financial- large firms can negotiate a lower loan rate as they borrow large sums and can also raise money through selling shares.
5. Managerial- specialists can be employed to increase efficiency.
6. Risk bearing- large firms have a more diversified product range and larger markets and can also afford to research and develop new products. This means they are less risky.

External Economies of Scale: benefits of  large industry.

1. Skilled labour- there is a greater supply of labour with work experience meaning training costs are lower and productivity higher.
2. Infrastructure- better road links, electrical supply, airports, dock facilities etc... Are built to support the industry.
3. Ancillary firms- suppliers of the industry will locate closer to the area. This decreases the cost of transport.
4. Co-operation- firms may join together to cut costs. E.g. share the costs and benefits of a research and development centre.

Diseconomies of scale: the disadvantages of a large firm.

1. Bureaucracy- too much resources are wasted through administration and decision making is slow as there are long communication channels. Because of this, average cost rises.
2. Labour relations- workers become less motivated as they feel unimportant. Resources have to be used to solve this.
3. Control and coordination- more supervision is needed to control and coordinate large firms which raises cost.

This shows the effect of economies and diseconomies of scale. The lowest cost possible is called the minimum efficient scale (MES).