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Economies of scale are savings firms achieve from growing larger. If the average cost of products falls when output increases, the firm or industry is experiencing economies of scale.

Contents 1 Internal economies of scale 1.1 Technical economies of scale 1.2 Managerial economies of scale 1.3 Marketing economies of scale 1.4 Financial economies of scale 1.5 Diversification 2 External economies of scale 2.1 Concentration 2.2 Information 2.3 Disintegration 3 Diseconomies of scale 4 Also See 5 Comments

Internal economies of scale

Internal economies of scale are the savings which occur within a firm, independent of other firms. They take place within the establishment.

Technical economies of scale

Large firms have savings in cost during production compared to small firms.

1. Linked processes can be used on a larger scale (e.g. a conveyor belt operation).
2. Increased dimensions. When a container's length, breadth and height is doubled, eight times the quantity can be stored inside. This is an important economy of scale in areas where bulky material must be transported (e.g. oil tankers).
3. Indivisibility of capital. In some industries, one single essential piece of capital equipment is expensive (e.g. blast furnace). In this case only large firms can afford to buy it.
4. Specialisation. This is Adam Smith's idea of the division of labour. Workers are able to become more efficient at a particular job when specialisation occurs. It also means no time is lost due to people changing jobs in the middle of a shift.

Managerial economies of scale

Savings from delegation and specialisation.

1. Delegation of authority so that accountants do the accountancy.
2. Functional specialisation' so that there is a separate sales department.
3. Managerial expertise - for example head-hunting the best workers.

Marketing economies of scale

Large scale buying and selling give the firm important savings in cost.

1. Bulk buying
2. Specialist buyer
3. Branding
4. Specialist transport
5. Sales outlets
6. Advertising

Financial economies of scale

Large firms find raising capital easier because large firms are considered a better risk. Large firms have more opportunity to be floated on the stock market.

Diversification

A large firm engaged in many markets is less risky because if one market goes down, the firm can still make money in the others (e.g. Virgin).

External economies of scale

Concentration

When a particular part of the country is devoted to one industry (e.g. Silicon Fen in Cambridge).

1. Skilled labour force
2. Transport facilities (e.g. better motorway network in the area)

Information

Firms exchange ideas and publish articles and magazines that promote the spread of information throughout the industry.

1. Trade journals
2. Independent Research

Disintegration

1. Ancillary trades
2. Service trades

Diseconomies of scale

When a firm grows excessively large it may experience diseconomies of scale. These are:

1. Coordination - firms find it difficult to manage dependencies between activities.
2. Communication - management and the workforce find it difficult to communicate.

Also See

Take a look at the other unit 1 A level economics revision notes:

• The Economic Problem (AQA, Edex, OCR, WJEC)
• Factors of production (AQA, OCR)
• Positive and normative economics (AQA)
• Specialisation and Trade (AQA, Edex, OCR, WJEC)
• Producer and consumer surplus (AQA, Edex, OCR, WJEC)
• Demand theory (AQA, Edex, OCR, WJEC)
• Supply theory (AQA, Edex, OCR, WJEC)
• Supply and Demand Equilibrium (AQA, Edex, OCR, WJEC)
• Elasticity of demand (AQA, Edex, OCR, WJEC)
• Elasticity of supply (AQA, Edex, OCR, WJEC)
• The Price Mechanism (AQA, Edex)
• Indirect Taxes and Subsidies (Edex)
• The labour market (Edex)
• Economies of scale (AQA)
• Allocative efficiency (OCR)

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