1. Economies and diseconomies of scale

2. Economies of scale
Factors that cause average unit costs to fall as the scale of output increases in the long run.

3. Diseconomies of scale
Factors causing average costs to rise as the scale of output increases in the long run

4. Two ways a firm can grow
Internal growth
External growth

5. Internal growth Firm expands own sales or output
Investment in new machinery
Employ more staff

6. External growth Created by takeover and merger activity
Research shows that on average takeovers and mergers fail to improve efficiency

7. Economies of scale
A pottery that could produce 100 vases at £5 each may be able to produce 1000 vases at £4.50 per unit. The total cost rises (from £500 to £4500), but the cost per unit falls. Assuming the firm sells the vases for £6 each, the profit margin rises from £1 to £1.50 per vase.

8. Bulk buying economies
As a business grows it will place larger orders with its suppliers, which enables them to negotiate discounts which will reduce their costs.

9. Technical economies of scale
Using more machinery and less labour will usually generate cost savings
New machinery may be less wasteful

10. Specialisation
When firms grow there is greater potential for managers to specialise in a particular task

11. Financial economies of scale
Successful small firms grow into large firms
Small firms are often over reliant on one product or customer

12. Marketing economies of scale
Large firms can spread the cost of a large sales force over multi million pound sales.

13. Other benefits of size
Reduced risk
Increased capacity utilisation

14. Diseconomies of scale Poor employee motivation Poor communication
Poor managerial coordination

15. Combining economies and diseconomies of scale
Growth creates both economies and diseconomies of scale

16. What can managers do about diseconomies of scale?
Corrective action required
Poor motivation
Delegate decision making power
Job enrichment
Split the business up into:
Autonomous work groups
Profit centres
Poor communication
Improve employee motivation as above
Send managers on training courses
Create new communication structures such as work councils
Poor coordination
Decentralise
Empowerment
Wider spans of control