3.3.3 Economies and Diseconomies of Scale

Question 1

What are ‘internal economies of scale’?

Answer 1

Occur when a firm becomes larger

Question 2

Give 3 examples of things that will lead to ‘internal economies of scale’?

Answer 2

• financial (larger firms are less risky to have easier access to credit)
• marketing (larger firms can spend more on marketing)
• technological (larger firms can invest more in technology)

Question 3

What are ‘external economies of scale’?

Answer 3

Occur when an industry gets larger

Question 4

Give an example of something that will lead to ‘external economies of scale’?

Answer 4

Infrastructure improvements, improvements in local roads will lead to a fall in transport costs for local industry, so their costs will fall

Question 5

What are ‘diseconomies of scale’?

Answer 5

Occur when output passes a certain point and average costs begin to increase per extra unit of good produced.

Question 6

Give 3 examples of things that will lead to ‘diseconomies of scale’?

Answer 6

• control (larger firms cannot monitor how productive a workforce is)
• coordination (harder to to help thousands of employees)
• communication (workers begin to feel alienated and excluded in a large firm)