Productive Efficiency

Average Costs Cost Of Production Output ATC Q1 Productive efficiency is achieved where the firm's output is produced at the lowest average cost. This is when a firm is exploiting economies of scale and waste of resources is minimised in the production process.

Production Possibility Boundary Good B Good A Productive efficiency is achieved where the firm's output is produced at the lowest average cost. This is when a firm is exploiting economies of scale and waste of resources is minimised in the production process. X Y

Economies of Scale A larger business is often able to do things more cheaply than a smaller one, other things being equal. Anything that helps save costs if the scale of operations increases is an economy of scale. The effects of economies of scale is to reduce the average total cost of production (ATC) as output increases. They give a business a competitive advantage leading to lower costs and/or higher profits. Internal Economies of Scale Technical economies – eg investment in specialist capital machinery, labour specialisation, the law of increased dimensions (especially important in transportation). Marketing economies of scale Managerial economies – eg finance manager, marketing manager, production manager etc. Financial economies Network economies – eg common in e-commerce. Adding 1 more user results in zero additional costs.

External Economies of Scale External economies do not occur within a firm but within the industry. Examples Service industries that spring up to serve the main industry. Schools and colleges develop specialist courses to provide workers for the industry. Firms from the same industry gathering together in one location, gain customers due to reputation of area. Eg the Jewellery Quarter in Birmingham, Cheshire Oaks, Harley Street etc Firms gather where there is easy access to raw materials. Generic marketing campaigns – eg milk marketing board, potato marketing board etc

Diseconomies of Scale Eventually firms will experience a rise in average costs. Potential diseconomies of scale may arise: Control – monitoring the staff in large organisation can prove difficult. Coordination – it can prove difficult to coordinate production over different plants or countries. Cooperation – workers in large organisations may feel undervalued and lose motivation.

Avoiding Diseconomies of Scale Developments in HRM – improvements in recruitment, training, promotion, retention and support. Performance related pay. Out sourcing – may overcome problems of control and co-ordination.