1. 4.2.2 Economies & Diseconomies of Scale
IGCSE Business Studies
4.2.2 Economies & Diseconomies of Scale

2. LEARNING OBJECTIVES
To understand the concepts of economies and diseconomies of scale.
To be able to refer to relevant examples in a particular scenario

3. Essential Question IS
BIGGER
BETTER?

4. Choosing the right scale task – 2 minutes
A major mistake that a new business can make is to get their scale wrong
Identify problems of starting out too:
Big
Small

5. Choosing the right scale suggested answers
A major mistake that a new business can make is to get their scale wrong:
Too big:
Borrow heavily to invest in many expensive fixed assets, large and prestigious offices/factory etc.
Sales then completely fail to meet forecasts and load repayments cannot be made
Too small:
Invest in minimal fixed assets, minimal staff and perhaps even work from home to reduce costs
Sales massively beat expectations and the business can’t cope – there are delays, perhaps quality is poor and mistakes are made as staff struggle to cope
While the business sorts itself out other competitors are able to enter the market and an opportunity is missed

6. Economies of scale
Economies of scale: Advantages of being a large firm due to lower average costs per unit

7. Task – 5 minutes Use pencil first!
On the mind map given, consider different types of economies of scale that a business could benefit from.
Use pencil first!

8. Answers: Economies of scale
More sources
of finance
Lower interest rates
Financial
Trading
Bulk-buying
Advertising
Economies
of scale
Product
Market
Diversity
Risk-Bearing
Specialist equipment
Division of labour
Technical
Specialist managers
Managerial

9. Economies of scale Trading economies
Larger firms are likely to get better rates when buying raw materials than smaller firms
The cost of advertising can be spread over more product units sold than in a small firm
They can transport much bigger loads than smaller firms at little extra cost
Both vehicles require one driver but...
Van payload approx 7m3
Lorry payload approx 60m3

10. Economies of scale
Financial: Larger firms find it cheaper and easier to raise money
Managerial: Larger firms can afford specialist managers – marketing experts, solicitors, accountants etc. which increases efficiency
Technical
Larger machinery is often more efficient
Division of labour enables workers to specialise
Risk-bearing: Bigger companies can spread their risk by investing in more products and more markets

11. Economies of scale task
Make a poster illustrating the main categories of Economies of Scale for your classroom wall

12. Diseconomies of scale

13. Diseconomies of scale
Diseconomies of scale: Very large businesses may become less efficient than smaller ones leading to increased unit costs
E.g. due to problems with
Communication
Coordination of the various departments/branches/factories etc.
Morale – staff may not feel valued

14. Economies and diseconomies of scale – task
Think of two local examples of fast food restaurants (burgers, pizza etc.)
One should be a small local business, and the other a national/multinational chain
What advantages/disadvantages does each one has compared to the other
Consider customer service, marketing, purchasing, recruitment and training of staff, access to sources of finance etc.

15. Quiz Time
Grab the boards
Try the quiz

16. Finally then…How does a business decide on the right scale?
Break-Even Point
Starting Capital needed
Competition
Potential demand
Perishability?
Maximum profit?
Business objectives
CELL needed