Economies & Diseconomies of Scale | Economics for GCSE/IGCSE - Year 11 PDF Download

An Introduction to Economies & Diseconomies of Scale

• As firms expand, they can increase production scale, leading to efficiencies that reduce average production costs known as economies of scale. This enables large firms to decrease production costs more than smaller firms can achieve.
• When a firm grows, it can enhance its scale of production, which brings cost-saving efficiencies termed as economies of scale. These efficiencies allow larger companies to reduce production costs significantly compared to smaller counterparts.
• However, as a firm further escalates its production scale, there comes a point where average costs start rising. This increase in costs is referred to as diseconomies of scale.
• Internal economies of scale emerge due to the expansion in production scale within the firm, leading to improved efficiency and cost reduction.

Diagram Analysis:

• With relatively low levels of production, companies face high average costs.
• Increasing production leads to the benefit of economies of scale, which in turn reduces the average cost per unit.
• At a certain production level, a company reaches productive efficiency, where it cannot further decrease costs.
• Beyond this point, the average cost starts to increase due to diseconomies of scale.

Types of Internal Economies & Diseconomies

External Economies of Scale

• External economies of scale emerge as the industry in which the firm operates expands, enabling the firm to enjoy reduced average costs (AC) originating from factors external to the firm.

Sources Of External Economies Of Scale