Economies Of Scale

Question 1

What are economies of scale?

Answer 1

Refers to the cost advantages that a business can achieve as it grows larger and produces more goods and services. It essentially means that when you make more, it costs less per unit

Question 2

Why do economies of scale happen?

Answer 2

Certain costs e.g rent and machinery, are spread out over more items as production increases. Plus, bigger businesses can often negotiate discounts on materials and get better deals from suppliers

Question 3

What are diseconomies of scale?

Answer 3

It happens when a business grows too big and instead of saving money, it starts costing more to produce each item. As the company gets larger, managing everything becomes harder.
Stocks may go off, more items are produced than the company is capable of selling, machinery may be overused.

Question 4

How to avoid diseconomies of scale?

Answer 4

Improve communication: use fewer layers of management to speed up decision making
Invest in technology: use advanced software and machinery to streamline production, inventory management and logistics
Maintain employee motivation and productivity: celebrate achievements to keep morale high

Question 5

What can diseconomies of scale lead to?

Answer 5

Communication issues
Coordination problems