Economies of scale

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    Economies of scale

     

    Definition:

     

    Economies of scale:        The cost advantages that an enterprise obtains due to expansion.

     

    Diseconomies of scale:                  The forces that cause larger firms and governments to produce goods and services at increased per-unit costs.

     

    Advantages of large-scale production

    Internal

     

    • Lower average unit costs. Scale of production because of a change in the way a firm is run. For example, larger firms can afford more effective advertising. They can spread the cost of advertising over a larger number of products.

     

    • For example companies can shut down small firms and open one large firm and paying fewer managers to run it. Another is technological economies, meaning that larger firms can buy more efficient and larger machinery and equipment, leading to lower average unit costs

     

    • Research and Development. Firms can afford to spend large amounts on research and development

     

    • They can afford to buy materials in bulk and therefore the unit costs are cheaper as they may be given discounts for buying in large quantities.

    External

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    • Geographical advantage. An area has an excellent reputation for producing a particular good/service or a pool of skilled labour may develop in an area where many firms are concentrated. This helps reduce training costs and probably makes recruitment easier.

     

    • Risk-bearing economies. When borrowing from a large loan, the company can use assets from profitable firms are collaterals and spread the risk of the loan over several firms.

     

    • Firms may cooperate with each other.

     

    • Similar and related firms. There may be firms in the area in related industries with similar expertise and knowledge.

    Disadvantages of large-scale production

     

    • Managerial deos. Breakdown of communication as firms get too large. This can lead to a delay in making decisions.

     

    • Labor deos. Decrease in staff morale as it is difficult to retain close personal contact with staff because of the size of the organization

     

    • Jobs may be broken down into specialist parts and the workers may find their jobs too repetitive and boring.

     

    Advantages of small firms

     

    • Flexibility. Small firms can adapt readily to consumer needs, designing products to meet individual requirements, whilst some products cannot be mass produced.

     

    • Industrial relations. The boss of the small firms tends to have a wide general knowledge of the performance of their employees, and may have a friendly relationship. This could increase morale and motivation. There is also less chance of poor productivity as there are less people in small firms.

     

    • Customer relations. Likewise, small firms are more likely to know their customers and to be able to offer personalized services to their customers. Personal attention is more feasible in small businesses, such as private music/sports tuition.

     

    Local monopoly. Some firms supply only to a small market, and specialist businesses are not interested in these markets.

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