Business Studies – 4.4.2 Economies and diseconomies of scale | e-Consult

Answer: Economies of scale refer to the cost advantages that a business can achieve as it produces more of a particular product or service. These advantages arise from spreading fixed costs over a larger number of units. There are several types of economies of scale a company might experience:

• Purchasing Economies: As production volume increases, the business gains more bargaining power with suppliers. This allows it to negotiate lower prices for raw materials, components, and supplies. Bulk discounts are a common example.
• Marketing Economies: Spreading marketing costs over a larger volume of products reduces the average marketing cost per unit. For example, advertising campaigns can be more cost-effective when they reach a wider audience. Brand recognition also becomes stronger with increased sales.
• Financial Economies: Larger companies often have easier access to finance and can secure loans at lower interest rates. They may also benefit from better credit ratings, further reducing borrowing costs. Spreading the cost of borrowing over a larger volume of sales also lowers the average cost of capital.
• Managerial Economies: Specialisation of labour becomes possible with increased production. This leads to more efficient management structures and the development of specialist managers. Larger companies can also afford to employ more skilled and experienced managers.
• Technical Economies: Larger production runs justify the use of more efficient and specialised machinery. This can lead to lower per-unit production costs. Technological advancements are also more easily adopted and implemented in larger factories. Automation becomes more economically viable.

However, it's important to note that diseconomies of scale can also occur if a business grows too large. These include problems with communication, coordination, and motivation of employees.