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Scale of Operation: Done By: Mohammed Sharif, Mohammed T, Abdullah Lootah

The document discusses the concept of economies and diseconomies of scale as it relates to a firm's size and operations. It explains that firms can gain efficiencies from economies of scale by growing larger, but becoming too large can lead to inefficiencies from diseconomies of scale. A firm can expand internally through organic growth or externally through mergers. The document also distinguishes between internal economies/diseconomies that are within a firm's control, and external ones influenced by industry and economic conditions. Internal economies come from factors like technology, purchasing power and administration, while internal diseconomies can arise from communication issues, coordination problems and low worker motivation in large firms.

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Mohammed Sharif
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80 views9 pages

Scale of Operation: Done By: Mohammed Sharif, Mohammed T, Abdullah Lootah

The document discusses the concept of economies and diseconomies of scale as it relates to a firm's size and operations. It explains that firms can gain efficiencies from economies of scale by growing larger, but becoming too large can lead to inefficiencies from diseconomies of scale. A firm can expand internally through organic growth or externally through mergers. The document also distinguishes between internal economies/diseconomies that are within a firm's control, and external ones influenced by industry and economic conditions. Internal economies come from factors like technology, purchasing power and administration, while internal diseconomies can arise from communication issues, coordination problems and low worker motivation in large firms.

Uploaded by

Mohammed Sharif
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Scale of Operation

Done by: Mohammed sharif, Mohammed T, Abdullah lootah

Increase in Scale
O A firms efficiency is affected by its size.

Large firms are often more efficient than small ones because they can gain from economies of scale, but firms can become too large and experience diseconomies of scale.

How does a firm expand?


O A firm can expand by increasing its scale

of operations in two ways: 1. Internal growth, also called organic growth (ask q about organic growth) 2. External growth, also called integration by merging with other firms (taking over other firms AKA inorganic growth) O By growing, a firm can expect to reduce its average costs and become more competitive.

Internal and External economies and Diseconomies of scale

External Economies
O External economies and diseconomies of scale are

the benefits and costs associated with the expansion of a whole industry and result from factors over which a single firm has little or no control. O External economies include the development of an industry or the whole economy. ( for example as an industry develops in a particular region an infrastructure of transport and communications will develop, which all industry members can benefit from)

External Diseconomies
O External diseconomies are costs which are

outside the control of a single firm and result of the over growth of a specific industry. (for example traffic, this may lead to certain types of resources being exhausted and so the price may rise because of the lack of supply)

Internal economies
O Internal economies and diseconomies of scale are associated

with the expansion of a single firm. There are different types of internal economies of scale: 1. Technical economies are the cost savings a firm makes as it grows larger, and arise from the increased use of large scale mechanical processes and machinery 2. Purchasing economies are gained when larger firms buy in bulk and achieve purchasing discounts. 3. Administrative savings can arise when large firms spread their administrative and management costs across all their plants, departments or divisions. O An addition could be for example that larger firms can bear business risks more effectively than smaller firms .

Internal Diseconomies
Larger firms will experience poor communication because they find it difficult to maintain an effective flow of information between the departments. 2. Coordination problems also effect large firms with many departments and divisions, and may find it much harder to take operations. (this can also be blamed at the more complicated span of control) 3. Low motivation of workers. This leads to lower productivity per worker. (an example of a lower motivation could be that the workers at lower levels of hierarchy could not have a chance to even talk to the manager or the owner of the business) O Another example would be that the firm may experience inefficiencies. This is because of the size and the complexity of most large businesses.)
1.

Link between economies of scale and unit costs


O If the output of the business is high, the

business experiences diseconomies of scale. This means that at this stage there will be higher costs and revenues. O If the output of the business is low, the business experiences economies of scale, this means that the business will have lower costs and may not experience any complexity from high levels of output

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