In small groups make a list of reasons why businesses benefit

from being large.

Compare your findings as a class.

PEARSON
EDEXCEL
INTERNATIONAL

GCSE BUSINESS 5.1 Economies and diseconomies of scale

 5.1 ECONOMIES AND DISECONOMIES OF SCALE

 IN THIS UNIT YOU WILL LEARN:

 Economies of scale:
 internal (falling average total costs as output increases)
 external (falling average total costs due to external factors)
 Diseconomies of scale:
 limits of growth
 ADVANTAGES OF GROWTH

 As a business grows it will benefit from economies of scale

 These are the advantages of producing on a large scale that lead to a fall in
average total costs
 Each item is cheaper to make

 The chart below shows the effect of economies of scale

Average cost

Output
 PROVE IT!

 A firm has FC of $200 000

 If it produces 1 000 units the VC per unit is $10
 If it produces 2 000 units the VC per unit is $9.80
 If it produces 3 000 units the VC per unit is $9.50
 What is the AC per unit
Output FC VC TC AC



Economies of scale are the
benefits enjoyed by a
business as it increases the
scale of its operations
leading to a fall in unit cost.
Unit cost is the cost of
producing one unit of
output.
ECONOMIES OF SCALE
 One significant benefit of growth is the ability to achieve economies of scale
 This is where the average or unit cost of production falls as the scale of production rises
 This means that the more units that a business produces, the lower the cost of producing
each one will become
 This is because the fixed costs such as rent or marketing are spread over more units
 Internal economies of scale occur due to an increase in the size of the firm. These
include:
 Managerial
 A larger firm can afford to employ the best people in their fields. These experts can
help both to increase revenue and reduce costs
 Purchasing
 A firm can gain a discounted price from a supplier as they are buying in larger
quantities
 ECONOMIES OF SCALE

 Internal economies of scale occur due to an increase in the size of the firm. These include:
 Financial
 Larger firms tend to be less risky. They already have an established customer base and are
likely to have assets that can be sold to pay off debt. Therefore, they can access cheaper
sources of finance as they are less of a risk

 Technical
 A firm can invest in new product development or technology to make their production
processes more efficient

 Risk-bearing
 Large firms can spread their risk. They can afford to make a loss in one market because they
are big enough to operate in other, more profitable markets
 ECONOMIES OF SCALE

 External economies of scale occur due to factors that the firm cannot control. These
include:
 Skilled labour
 This occurs when geographical areas specialise in a particular industry. This leads to a greater
pool of labour with the required skills
 Infrastructure
 This is developed in geographical areas to suit the needs of specific industries. This might
include transport systems and information systems that provide more and better quality
access to data
 Access to suppliers
 This occurs as firms set up nearby in order to supply larger firms with particular services at
each stage of the production process e.g. provision of raw materials
 Similar businesses in the area
 This occurs as similar firms cluster around each other. This can be seen in the banking
industry in London. All firms can benefit from the expertise of skilled workers and access to
supplies
 QUESTION PRACTISE

Ciao Bella is a chain of 6 Italian restaurants. It has an excellent reputation for its pizzas cooked
fresh to order in its wood burning ovens and delicious range of specialist coffees. Manager and
owner Izzie is however concerned that it struggles to compete on price with its larger competitors
such as Pizza Express who often run special promotions including vouchers for buy one get one
free.

1) What is meant by economies of scale?

2) Explain two ways in which larger business such

as Pizza Express, a UK chain of pizza restaurants,
can use its size as an advantage over smaller
businesses such as Ciao Bella.
 DISADVANTAGES OF GROWTH

 As a firm grows in size it can suffer from diseconomies of scale

 These are the disadvantages of producing on a large scale leading to a rise
in average total costs
 Each item becomes more expensive to make

 The chart below shows the effect of diseconomies of scale

Average cost

Output

Diseconomies of scale are the
disadvantages experienced by
a business as it grows leading
to a rise in unit costs.
DISECONOMIES OF SCALE:
LIMITS OF GROWTH
 Diseconomies of scale occur when a business becomes inefficient because of
growth
 This leads to a rise in unit costs
 Diseconomies of scale include:
 Communication
 As there are more people within the organisation it becomes more difficult to keep
everyone up to date and informed
 Messages may get confused or take to long to get to the right people
 Relationships with suppliers may become difficult to maintain
 DISECONOMIES OF SCALE:
LIMITS OF GROWTH

Diseconomies of scale are the  Coordination

disadvantages experienced by
a business as it grows leading  The increased number of resources e.g. staff, raw materials and machinery are
to a rise in unit costs.
difficult to coordinate to ensure everything is being used efficiently

 Reduced staff motivation

 Employees may feel overworked and stressed leading to them not working so hard
reducing productivity
 Employees may be absent
 Feel like a number where they are not treated as individuals in the work place
 DISECONOMIES OF SCALE:
LIMITS OF GROWTH

 Explain why, as a business grows, there is an increased risk of

Is it better to be big or
diseconomies of scale
small in business?
 IS IT AN ECONOMY OR DISECONOMY?

 Lactic Hen
 Spinach Rug
 Coma count mini Solve each of these anagrams and state
whether they are an economy or
 Action indoor diseconomy of scale

 A clan if in
 5 MINUTE TEST

 What is an economy of scale?

 Name 2 economies of scale?
 What is a diseconomy of scale?
 Name 2 diseconomies of scale?
 What is meant by average total cost?

End
 5.1 ECONOMIES AND DISECONOMIES OF SCALE

 IN THIS UNIT YOU HAVE LEARNT ABOUT:

 Economies of scale:
 internal (falling average total costs as output increases)
 external (falling average total costs due to external factors)
 Diseconomies of scale:
 limits of growth