Economies & Diseconomies of Scale (Cambridge (CIE) IGCSE Economics): Revision Note

Large firms can borrow money at lower interest rates, as they are seen as less risky by lenders

They also have access to a wider range of finance sources

As firms grow, they can hire specialist managers for different departments, leading to more efficient decision-making and improved productivity

Larger firms can spread the cost of marketing (e.g. advertising, promotion) over a greater output, reducing the cost per unit sold

Bigger firms buy inputs (e.g. raw materials) in bulk, allowing them to negotiate lower prices and better terms with suppliers

Large-scale production allows firms to invest in more advanced equipment or use production techniques that smaller firms cannot afford, improving efficiency

Large firms can spread risk by operating in different markets or producing a range of products, so failure in one area has less impact overall

Occur when managers work more in their own interest than in the interest of the firm, e.g. managers become territorial and obstructive thus reducing efficiency and increasing the average costs

Occur when a firm with multiple layers of management and perhaps in multiple geographic locations struggles to communicate quickly and efficiently, leading to slow responses and increased average costs

Occur when a firm has widespread bases of operations and this leads to logistical and communication challenges which can raise the average costs

Occur when a firm expands into foreign markets in which workers have very different cultural work or productivity norms, which can raise the average costs

As an industry grows, ancillary firms move closer to major manufacturers to cut costs and generate more business

This lowers the average total cost

• For example, car manufacturers in Sunderland rely on the service of over 2,500 ancillary firms

Improved transport links develop around growing industries in order to help get people to work and to improve the transport logistics

This lowers the average total costs

• For example, Bangalore is know as India's Silicon Valley and transportation projects have been successful in transforming the movement of people and goods

An increase in skilled labour can lower the cost of skilled labour, thereby lowering the average total cost

The larger the geographic cluster, the larger the pool of skilled labour

Governments may pass laws that help to lower business costs

This often generates significant reductions in average total costs, as governments support certain industries in order to achieve their wider objectives