Economies & Diseconomies of Scale (DP IB Business Management)

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)

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

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

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

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

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

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