Economies & Diseconomies of Scale (Cambridge (CIE) O Level Economics)

An Introduction to Economies and Diseconomies of Scale

• As a firm grows, it is able to increases its scale of output generating efficiencies that lower its average costs (AC) of production

  • These efficiencies are called economies of scale

  • Economies of scale help large firms to lower their costs of production beyond what small firms are able to achieve 

• As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale  

• Internal economies of scale occur as a result of the growth in the scale of production within the firm

Diagram analysis

• With relatively low levels of output, the firms average costs are high

• As the firm increases its output, it begins to benefit from economies of scale which lower the average cost per unit

• At some level of output, a firm will not be able to reduce costs any further - this point is called productive efficiency

• Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

Types of Internal Economies and Diseconomies

Types of Internal Economies and Diseconomies of Scale

External Economies of Scale

• External economies of scale occur when there is an increase in the size of the industry in which the firm operates

  • The firm is able to benefit from lower average costs (AC) generated by factors outside of the firm
    

Sources of External Economies of Scale