Economies And Diseconomies Of Scale
Economies and diseconomies of scale
Economies of scale are advantages that arise for a firm because of its larger size, or scale of operation. These advantages translate into lower unit costs (or improved (productive efficiency), although some economies of scale are not so easy to quantify.
The main kinds of Economies of Scale are:
Bulk- Wholesale is selling goods in tremendous quantities at a low unit price to retail merchants. The wholesaler will accept a slightly lower sales price for each unit, if the retailer will agree to purchase a much greater quantity of units, so the wholesaler can maximize his profit. A wholesaler usually represents a factory where goods are produced.
Technical – it may be cost-effective to invest in more advanced production machinery, IT and software when operating on a larger scale.
Managerial – larger firms can afford to have specialist managers for different functions within a business – such as Marketing, Finance and Human Resources. Furthermore, they may be able to pay the higher salaries required to attract the best people, leading to better planning and decision making.
Marketing – more options are available for larger firms, such as television and other national media, which would not be cost-effective for smaller producers. The marketing cost for selling 10 million items might be no greater than to sell 1 million items. Larger firms might find it easier to gain publicity for new launches simply because of their existing reputation.
Financial – there is a wider range of finance options available to larger firms, such as the stock market, bonds and other kinds of bank lending. Furthermore, a larger firm is likely to be perceived by banks as a lower risk and the cost of borrowing is likely to be lower.
Diseconomies of scale:
Lack of motivation – in larger firms, workers can feel that they are not appreciated or valued as individuals. It can be more difficult for managers in larger firms to develop the right kind of relationship
Economies of scale are advantages that arise for a firm because of its larger size, or scale of operation. These advantages translate into lower unit costs (or improved (productive efficiency), although some economies of scale are not so easy to quantify.
The main kinds of Economies of Scale are:
Bulk- Wholesale is selling goods in tremendous quantities at a low unit price to retail merchants. The wholesaler will accept a slightly lower sales price for each unit, if the retailer will agree to purchase a much greater quantity of units, so the wholesaler can maximize his profit. A wholesaler usually represents a factory where goods are produced.
Technical – it may be cost-effective to invest in more advanced production machinery, IT and software when operating on a larger scale.
Managerial – larger firms can afford to have specialist managers for different functions within a business – such as Marketing, Finance and Human Resources. Furthermore, they may be able to pay the higher salaries required to attract the best people, leading to better planning and decision making.
Marketing – more options are available for larger firms, such as television and other national media, which would not be cost-effective for smaller producers. The marketing cost for selling 10 million items might be no greater than to sell 1 million items. Larger firms might find it easier to gain publicity for new launches simply because of their existing reputation.
Financial – there is a wider range of finance options available to larger firms, such as the stock market, bonds and other kinds of bank lending. Furthermore, a larger firm is likely to be perceived by banks as a lower risk and the cost of borrowing is likely to be lower.
Diseconomies of scale:
Lack of motivation – in larger firms, workers can feel that they are not appreciated or valued as individuals. It can be more difficult for managers in larger firms to develop the right kind of relationship