4.2.2 Economies & Diseconomies of Scale IGCSE Business Studies 4.2.2 Economies & Diseconomies of Scale

LEARNING OBJECTIVES To understand the concepts of economies and diseconomies of scale. To be able to refer to relevant examples in a particular scenario

Essential Question IS BIGGER BETTER?

Choosing the right scale task – 2 minutes A major mistake that a new business can make is to get their scale wrong Identify problems of starting out too: Big Small

Choosing the right scale suggested answers A major mistake that a new business can make is to get their scale wrong: Too big: Borrow heavily to invest in many expensive fixed assets, large and prestigious offices/factory etc. Sales then completely fail to meet forecasts and load repayments cannot be made Too small: Invest in minimal fixed assets, minimal staff and perhaps even work from home to reduce costs Sales massively beat expectations and the business can’t cope – there are delays, perhaps quality is poor and mistakes are made as staff struggle to cope While the business sorts itself out other competitors are able to enter the market and an opportunity is missed

Economies of scale Economies of scale: Advantages of being a large firm due to lower average costs per unit

Task – 5 minutes Use pencil first! On the mind map given, consider different types of economies of scale that a business could benefit from. Use pencil first!

Answers: Economies of scale More sources of finance Lower interest rates Financial Trading Bulk-buying Advertising Economies of scale Product Market Diversity Risk-Bearing Specialist equipment Division of labour Technical Specialist managers Managerial

Economies of scale Trading economies Larger firms are likely to get better rates when buying raw materials than smaller firms The cost of advertising can be spread over more product units sold than in a small firm They can transport much bigger loads than smaller firms at little extra cost Both vehicles require one driver but... Van payload approx 7m3 Lorry payload approx 60m3

Economies of scale Financial: Larger firms find it cheaper and easier to raise money Managerial: Larger firms can afford specialist managers – marketing experts, solicitors, accountants etc. which increases efficiency Technical Larger machinery is often more efficient Division of labour enables workers to specialise Risk-bearing: Bigger companies can spread their risk by investing in more products and more markets

Economies of scale task Make a poster illustrating the main categories of Economies of Scale for your classroom wall

Diseconomies of scale

Diseconomies of scale Diseconomies of scale: Very large businesses may become less efficient than smaller ones leading to increased unit costs E.g. due to problems with Communication Coordination of the various departments/branches/factories etc. Morale – staff may not feel valued

Economies and diseconomies of scale – task Think of two local examples of fast food restaurants (burgers, pizza etc.) One should be a small local business, and the other a national/multinational chain What advantages/disadvantages does each one has compared to the other Consider customer service, marketing, purchasing, recruitment and training of staff, access to sources of finance etc.

Quiz Time Grab the boards Try the quiz

Finally then…How does a business decide on the right scale? Break-Even Point Starting Capital needed Competition Potential demand Perishability? Maximum profit? Business objectives CELL needed