Economies of Scale

Economies of scale are the cost advantages that a business can obtain due to expansion.

Internal Economies of Scale
These are the lower unit costs that a single firm can gain due to expansion.

Technical
- specialization: large organizations can employ specialized labor

Commercial
- large firms can negotiate favorable prices as a result of buying in bulk
- large firms may have advantages in keeping prices higher because of their market power

Financial
- large firms are able to negotiate cheaper finance deals
- large firms are able to be more flexible about finance (eg. share options, rights)

Managerial
- use of specialists (eg. accountants, marketing, lawyers, human resources, etc.)

Risk-Bearing
- diversification
- markets across regions/ countries
- research and development

External Economies of Scale
These are the benefits to the company from the area that they are in.

- supply of skilled labor
- reputation
- local knowledge and skills
- infrastructure
- training facilities

Diseconomies of Scale
These are the disadvantages of large scale production that can lead to increasing average costs.

- problems with management
- maintaining effective communication
- coordinating activities (often across the world)
- de-motivation and alienation of staff
- divorce of ownership and control