Economies & Diseconomies of Scale (SL IB Business Management)

Financial economies

• Large firms often receive lower interest rates on loans than smaller firms as they are perceived as being less risky
• A cheaper loan lowers the cost per unit (average cost)

Managerial economies

• Occurs when large firms can employ specialist managers who are more efficient at certain tasks and this efficiency lowers the average cost (AC)
• Managers in small firms often have to fulfil multiple roles and are less specialised

Marketing economies

• Large firms spread the cost of advertising over a large number of sales and this reduces the AC
• They can also reuse marketing materials in different geographic regions which further lowers the AC

Purchasing economies

• Occur when large firms buy raw materials in greater volumes and receive a bulk purchase discount which lowers the AC

Technical economies

• Occur as a firm can use its machinery at a higher level of capacity due to the increased output thereby spreading the cost of the machinery over more units & lowering the AC

Risk bearing economies

• Occur when a firm can spread the risk of failure by increasing its numbers of products i.e greater product diversification - less failure lowers AC

• As an industry grows, ancillary firms move closer to major manufacturers to cut costs & generate more business
• This lowers the AC e.g. car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms

Transport Links

• Improved transport links develop around growing industries to help get people to work & to improve the transport logistics
• This lowers the AC e.g. Bangalore is known as India's Silicon Valley & transportation projects have been successful in transforming the movement of people & goods

• An increase in skilled labour can lower the cost of skilled labour, thereby lowering the AC
• The larger the geographic cluster, the larger the pool of skilled labour

• This often generates significant reductions in AC as governments support certain industries to achieve their wider objectives 

• Occur when managers work more in their self interest than in the interest of the firm
  
  • E.g. Managers become territorial & obstructive thus reducing efficiency and increasing the AC

• Occur when a firm's organisational structure becomes more complex with multiple layers of management resulting in communication difficulties
   
• This leads to slow responses and increased average costs

• Occur when a firm has widespread bases of operations across multiple geographic locations 
  
  
• This leads to logistical & communication challenges which can raise average costs

• Occur when a firm expands into foreign markets in which workers have very different work or productivity norms
  
  
• Particularly during the early stages of expansion this leads to production disruption which can raise the average costs