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Economy Of Scale Essay

516 words - 3 pages

There are several ways how companies can grow. Expanding the scale of the firm's production is one way to grow their business. In term of economies and diseconomies of scale ,these are linked to benefits and drawbacks of the rising productive capacity of firm. Gregson et al (2009:134) states that economies of scale occur when a firm increases output, the cost of producing each item goes down ,but diseconomies of scale make the unit cost of production rise as output rises. This essay will analyse the economies and diseconomies of scale. After first considering the factors for internal economies of scale,it will examine the factors of external economies of scale. Then, it will discuss the problems which are related to these factors for diseconomies of scale.
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Another factor for internal economies of scale is technical economies which are linked to production. Production methods for large figures are often more efficient. Brewer (2004:62) and Marcouse et al (2011:441) explain that the firm gets bigger it will usually have a greater desire and ability to invest in more efficient machines. As a result of using advanced machinery, this might mean they need fewer labour, and then wage costs will fall.
The third factor for internal economies of scale is financial economies that occur when companies borrow money. Many small firms often find it difficult to gain money because the lenders feel less comfortable and high risky lending money to a small firm than a big firm (Marcouse et al,2011:442). Thus,large firms can borrow at lower rates of interest than smaller firms.
A further factor for internal economies of scale is marketing economies. Marketing economies of scale are to do with promotional costs. Gregson et al(2009:134) notes that a business with a large output can share out the cost over more products than a firm with a low output. Large firms will reduce advertising and marketing budget if the name of the firm becomes well known (Brewer ,2004:62).
Finally, purchasing economies is one factor for internal economies of scales. They are linked to do with discounts. Suppliers are generally more willing to give a lower price for a larger order which is more profitable to them. Marcouse et al (2011:441)states that the firms who can place large orders will have more powerful in the market and they can often negotiate both power unit prices. Brewer (2004:62) also points out that the large companies not only get higher discounts but also they will get longer credit periods than their smaller competitors.

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