Operational

Strategies Scale & Resource

Mix
How do companies choose the right scale of production?

Economies of scale
By the end of this lesson you should be able
to
Describe what is meant by economies of

scale
Explain 3 different examples of economies of
scale
Discuss why companies can also experience
diseconomies of scale

If the next
number is higher
/ lower what will
it do to the
average?

How to do calculate an average?

35

25

50

15

25

20

22

35

20

54

15

80

20

Batting average

Goals scored

Cost of a haircut
in Dorking

1. Economies of
scale
Arise when
unit costs fall
as output
increases

Economies of scale
By the end of this lesson you should be able
to
Describe what is meant by economies of

scale
Explain 3 different examples of economies of
scale
Discuss why companies can also experience
diseconomies of scale

Unit costs formula - reminder

Average cost per unit is calculated using this
formula:

Total production costs in period

()
Total output in period (units)

Economies of scale illustrated

Unit costs are falling as
output increases from Q1
to Q2
= economies of scale

Average
Cost per
Unit ()

Cost
Curve

AC1

AC2
Unit costs start to rise
as output rises above
Q3
= diseconomies of
scale

Q1

Q2

Q3

Quantity of output

Diseconomies of Scale
Costs

LAC

The level of output

at which average
Economies
cost stops
falling asof Scale
output increases

Diseconomies of Scale

Minimum efficient scale

Output

Minimum efficient scale

The output at
which average
unit costs of
production are at
their minimum

Internal v External Economies of

Scale
Internal

External

Arise from the

increased
output of the
business itself

Occur within
an industry:
all
competitors
benefit

Examples of Internal economies of

scale
Buying
economies

Buying in greater quantities usually results in a lower

price (bulk-buying)

Technical

Use of specialist equipment or processes to boost

productivity

Marketing

Spreading a fixed marketing spend over a larger range

of products, markets and customers

Network

Adding extra customers or users to a network that is

already established (e.g. mobile phones)

Financial

Larger firms benefit from access to more and cheaper

finance

External economies of scale

Arise from the industry as a whole i.e. all

competitors benefit

Often associated with particular geographic areas

E.g. Creative & media in London

Examples
Having many specialist suppliers close by
Access to research and development facilities
Pool of skilled labour to choose from

Diseconomies of scale
Factors which cause the
average production cost
per unit of a business to
increase above the
efficient level

Economies of scale
For your exam the board want you to focus

on
Purchasing

Technical

Specialisation

It is still worth knowing about others to build

out your answers and display your wider

knowledge!

Examples of diseconomies of scale

Poor communication
More difficult to control a larger, more

complex business
More frequent machinery & employee
breakdown if output & capacity utilisation
is too high
Loss of management

focus

What about this for scale!

Oasis of the seas

What advantages does the stunning scale of

the ship offer customers and the operator

Royal Caribbean?
Are there potential diseconomies of scale?

Quick revision test 10 mins

Its the last 10 mins of the exam
There are two questions left
One of them is on economies of scale
You have the potential to shift up a grade by

just picking up 10 marks