Economics · Ch 3 — Production Analysis
Economies and Diseconomies of Scale
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Economies and Diseconomies of Scale
As a firm expands its scale of production in the long run, its average cost per unit is affected by economies of scale (advantages that LOWER average cost as scale grows) and, beyond some point, diseconomies of scale (disadvantages that RAISE average cost). These are classified into two broad types, depending on whether they arise from within the firm itself or from the growth of the wider industry:
Note
Internal vs External Economies and Diseconomies
- Internal economies of scale: advantages a firm gains purely from the growth of its OWN size, available to that firm alone. Examples: technical economies (large, specialised machinery becomes worthwhile only at a large scale), managerial economies (a large firm can afford specialist departments — finance, marketing, personnel — each run more efficiently than one generalist could manage), and financial economies (large, well-established firms can raise loans at lower interest rates than small firms).
- Internal diseconomies of scale: disadvantages a firm brings upon ITSELF by expanding beyond its efficient size — chiefly managerial diseconomies, where a firm becomes so large that coordination, communication and decision-making genuinely become slower and less effective, and labour diseconomies, where a very large workforce becomes harder to supervise and motivate.
- External economies of scale: advantages available to EVERY firm in an industry when the WHOLE industry (not just one firm) grows and concentrates in a region — for example, a pool of skilled, industry-trained labour becomes available locally, specialised ancillary and component suppliers set up nearby, and better transport or power infrastructure develops to serve the whole industrial cluster. …