Economies of Scale - Benefits of large scale production that result in falling long run average cost

Internal Economies of Scale Technical: - larger companies can use more machines, specialist equipment and division of labour to gain greater efficiency and lower costs Managerial / Administrative: - larger companies can employ specialist managers to oversee the work of employees, ensuring they are maximising their output and are coordinated in their efforts - specialists can be employed to undertake specific administrative tasks such as accountants

Internal Economies of Scale Financial: - larger firms find it easier to get a loan from a bank and probably get a lower interest rate due to being considered more reliable in their ability to pay it back (may also have more collateral available) Purchasing / Marketing: - larger firms can negotiate discounts for buying raw materials in bulk and can spread the cost of advertising over more units of output Risk-Bearing: - larger firms can spread their risk over a number of products or a number of markets so if one area has problems, they are better able to withstand the shock and stay in business

External Economies of Scale Companies can benefit from the growth of their industry and the introduction of other firms doing what they do. - can share the cost of infrastructure - specialist suppliers may start to provide supplies for all firms in a more efficient way - there will be a larger pool of trained labour among all the firms, reducing the overall training cost - marketing costs can be reduced if companies are located near each other and customers know where to find them easily

Diseconomies of Scale Rise in Long Run Average Costs from a firm getting too big - coordination – problems can arise, keeping all parts of the business working in step in the most efficient manner - communication – it can be more difficult for all people in the business to know what is happening and their part in it - control – those running the company can lose control over what is happening in all the various departments / countries / etc - cooperation – people working far from the central management core can feel alienated and not involved – if they don’t care, they may not work efficiently

LRAC revisited LRAC Economies of scale (↓ LRAC) Constant Returns to Scale (min LRAC is also ‘minimum efficient scale’) Diseconomies of scale (↑ LRAC)