Economies Of Scale
Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:
- purchasing economies - when large businesses often receive a discount because they are buying in bulk
- marketing economies - from spreading the fixed cost of promotion over a larger level of output
- administrative economies - from spreading the fixed cost of management staff and IT systems over a larger level of output
- research and development economies - from spreading the fixed costs of developing new or improved products over a larger level of output
- A business can become so large that its unit costs begin to rise. Expanding firms can experience diseconomies of scale. Causes include:
- Ineffective communication. Coordinating large numbers of staff becomes a challenge. Big businesses can develop many levels of hierarchy which slow down communication or even lead to miscommunication.
- Reduced motivation. Staff can feel remote and unappreciated in a large organisation. When staff productivity begins to fall, unit costs begin to rise.