Acid Rain. Climate Change. Climate Feedback. Ocean Acidification. Rising Sea Level. Economies of scale. External economies and diseconomies of scale are the benefits and costs associated with the expansion of a whole industry and result from external factors over which a single firm has little or no control.
External economies of scale include the benefits of positive externalities enjoyed by firms as a result of the development of an industry or the whole economy. For example, as an industry develops in a particular region an infrastructure of transport of communications will develop, which all industry members can benefit from.
Specialist suppliers may also enter the industry and existing firms may benefit from their proximity. External diseconomies are costs which are outside the control of a single firm and result of the growth of a specific industry.
For example, negative externalities , such as road congestion, can result from the growth of an industry in a specific region. Resources may become exhausted and the price of resources may rise as demand outstrips supply.
Internal economies and diseconomies of scale are associated with the expansion of a single firm. However, economic theory suggests that average costs will eventually rise because of diseconomies of scale. They are economies of scale enable more favourable rates of borrowing.
That is, larger businesses are seen by lenders as more reliable or worthy of credit due to their size, whereas smaller businesses will tend to pay higher rates of interest. The benefits of economies of scale to industries and businesses are wide-ranging, but generally speaking, it enables large corporations to reduce their costs, pass the savings onto the consumer, and gain an advantage over the competition. So, what are the advantages of economies of scale?
Reduced long-term unit costs — One of the main benefits of internal economies of scale is reduced costs, enabling businesses to improve their price competitiveness in global markets. Increased profits — Economies of scale lead to increased profits, generating a higher return on capital investment and providing businesses with the platform to grow.
Larger business scale — As a business grows in size, it solidifies and becomes less vulnerable to external threats, such as hostile takeover bids. Of course, there are also plenty of advantages of economies of scale for consumers, as lower unit costs often feed through to reduced prices. What are the advantages of economies of scale for consumers? Lower prices — Reduced cost-per-unit leads to lower prices for the consumer, meaning that overall, consumers will have higher real incomes and easier access to affordable products.
Product improvements — Businesses can potentially reinvest their capital savings in research and development, leading to improved products e. Higher wages — For employees, another key benefit of economies of scale is the potential for profit sharing and higher real wages due to savings on cost. When a business becomes too large, its unit costs may begin to rise.
Diseconomies of scale can be caused by a number of different factors, including:. Poor communication — Ineffective communication, wherein it becomes more difficult to coordinate a large workforce as your company grows, is one of the major factors behind diseconomies of scale. Loss of control — As a business grows, it becomes increasingly difficult to monitor the productivity and quality of thousands of employees, leading to inefficient production processes.
Duplication of effort — Duplication of effort can also be an issue, where more than one person ends up working on the same function or task. Weak morale — As businesses become larger, staff are more likely to feel remote and develop a sense of alienation, which can lead to reduced productivity and wastage. External opposition — Behaviour that would have gone unpunished in a smaller firm is more likely to be seen as a threat as a business increases in size, leading to public and government opposition.
Your Practice. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. What Are Economies of Scale? Key Takeaways Economies of scale are cost advantages companies experience when production becomes efficient, as costs can be spread over a larger amount of goods.
A business's size is related to whether it can achieve an economy of scale—larger companies will have more cost savings and higher production levels. Internal economies are caused by factors within a single company while external factors affect the entire industry. What are economies of scale? What causes economies of scale? Why are economies of scale important? Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Why Minimum Efficient Scale Matters The minimum efficient scale MES is the point on a cost curve when a company can produce its product cheaply enough to offer it at a competitive price. Understanding Diseconomies of Scale Diseconomies of scale occur when a business expands so much that the costs per unit increase.
It takes place when economies of scale no longer function. What Are External Economies of Scale? External economies of scale is economies of scale for an entire industry and not just a particular company.
Quantity Discount Definition A quantity discount is an incentive offered to buyers that results in a decreased cost per unit of goods or materials when purchased in bulk.
Long Run Definition The long run refers to a period of time where all factors of production and costs are variable, and the goal is to produce at the lowest cost. What's an Operating Cost? Operating costs are expenses associated with normal day-to-day business operations.
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