Economies and diseconomies of scale
Introduced| English | Meaning |
|---|---|
| output/ˈaʊtpʊt/ | The goods, services or other results produced by an activity or production process. |
| average cost/ˈævrɪdʒ kɒst/ | Total production cost divided by the quantity produced. |
| per unit/pɜː ˈjuːnɪt/ | per unit |
| economies of scale/ɪˈkɒnəmiz ɒv skeɪl/ | Falls in average production cost as the scale of output increases. |
| optimal/ˈɒptɪml/ | optimal |
| diseconomies of scale/ˌdɪsɪˈkɒnəmiz ɒv skeɪl/ | Increases in average production cost as the scale of output grows. |
| purchasing/ˈpɜːtʃɪsɪŋ/ | purchasing |
| bulk-buying/bʌlk ˈbaɪɪŋ/ | bulk-buying |
| coordination/kəʊˈɔːdɪneɪʃn/ | Organising activities and people so their work fits together towards a shared purpose. |
| motivation/ˌməʊtɪˈveɪʃn/ | The reasons or influences that encourage a person to act or make an effort. |
Why bigger can be cheaper
- A bakery making 10,000 loaves can buy flour far more cheaply per bag than one making 100.
- As output 产出 grows, the average cost 平均成本 per unit 每单位 often falls — the power of economies of scale 规模经济.
Economies of scale occur when, as output rises:
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Average (per-unit) cost falls with greater scale.
The shape of average cost
- Economies of scale: as output rises, average cost falls.
- Beyond an optimal 最优的 size, diseconomies of scale 规模不经济 set in and average cost rises again.
Average cost falls as the firm grows, reaches a minimum, then rises if it grows too large.
Economies of scale
y = ax² + bx + c
Average cost falls then rises — economies, then diseconomies, of scale.
Which are sources of economies of scale? (Select all that apply.)
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Poor communication is a diseconomy, not an economy.
Sources of economies of scale
- Purchasing 采购: bulk-buying 批量采购 discounts.
- Technical: large, efficient machines spread over more output.
- Financial: big firms borrow more cheaply.
- Managerial: afford specialist managers.
Average cost per unit falls then rises as a firm grows
Diseconomies of scale cause average cost to:
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Beyond the optimal size, average cost rises again.
When a firm grows so large that average cost rises, it suffers ______ of scale.
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Communication and coordination problems drive diseconomies.
Diseconomies of scale
- Communication breaks down in large organisations.
- Coordination 协调 gets harder and slower.
- Motivation 激励 falls as workers feel like a small cog.
Economies of scale are about average cost, not total cost. Total cost still rises with output — it's the cost per unit that falls. Don't confuse the two.
Economies of scale lower the average cost per unit, even though total cost still rises with output.
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It is per-unit cost that falls, not total cost.
You've got it
- economies of scale: average cost falls as output rises (purchasing, technical, financial, managerial)
- diseconomies of scale: average cost rises if too large (communication, coordination, motivation)
- it is average (per-unit) cost that falls, not total cost