Economies and diseconomies of scale AO2 only
AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Sugges
Start with a questionWhy are there no Hairdressing businesses the same size as Volkswagen cars?
Answer - Economies and Diseconomies of scale
Economies of scale are when the cost per unit of production (Average cost) decreases because the output (sales) increases.
Diseconomies of scale are when the cost per unit of production (Average cost) increases because the output (sales) increases.
Growth brings both advantages and disadvantages to a business. These interact, and depending on the nature of the business and the way it is managed, decide the optimum or most efficient size for the business.
This is the area of economies and diseconomies of scale.Figure 1 illustrates that average cost falls as output increases, with the result that large firms may enjoy lower costs that smaller competitors. This competitive cost advantage allows large firms to have larger profit margins and have more options in pricing policy.