Economies of Scale: Impact on Business Growth

Unit 1.6: Growth and Evolution

Economies of Scale

• The long-run average costs fall as more output is produced.
• The idea of getting bigger is cheaper.
• When the costs of a business go down as the business grows.

Internal Economies of Scale

• Purchasing: The price is lower if you buy in large quantities.
• Financial: Big businesses are seen as less of a risk than smaller businesses.
• Managerial: They have specialized managers in the different areas which brings costs down as efficiency rises.
• Technical: Only big businesses can afford to buy the best technology, which in the long run brings down costs.
• Marketing: Large-scale businesses are the ones who can afford and spread the cost of the most effective and expensive types of marketing.

External Economies of Scale

• Consumers: Shopping, small businesses benefit from a much bigger infrastructure.
• Employees

Diseconomies of Scale

Extremely large businesses may suffer diseconomies of scale:

• Increase in average unit cost as the business increases in size.
• When average costs start increasing because of extremely large-scale production.

Advantages of Being a Big Business

• Survival: They are less likely to fail and less likely to be taken over by another firm.
• Economies of scale: Big businesses usually enjoy greater profits, higher returns, and a healthier balance sheet.
• Higher status: Larger status than small businesses.
• Market leader status: For example, McDonald's is the market leader of fast foods; it can change market habits.
• Increased market share: Large companies with market shares can control the market by determining prices and deciding which services will be the industry standard.

Advantages of Being a Small Business

• Greater focus: They can focus investments where they want and where they find it much more convenient. They have lower profits than larger businesses but often they have greater profitability and higher returns on investments.
• Greater cachet: They have a greater sense of exclusiveness. And due to this, they can charge more for their goods and services.
• Greater motivation: They usually have motivated employees.
• Competitive advantage: Being small, providing personalized service, and being flexible can give a competitive advantage.
• Less competition: Big businesses do not consider competing with really small businesses, this provides less competition for them.