Economies/diseconomies of scale and Productivity

Boost your business knowledge! Learn about economies of scale, productivity, and efficiency.

Examples of Economies of Scale Sort the following economies of scale into the most appropriate group: Production Economies Large scale producers can employ techniques that cannot be used by a small scale producer. Able to transport bulk materials. Mass production means that unit costs are lower. Purchasing Economies Large businesses can employ specialist staff. Bulk buying – being able to buy goods in bulk lowers the unit price. Technical Economies A large firm could use computers and technology to replace employees on a production line. Marketing Economies Advertising costs can be spread. Financial Economies Easier for large firms to raise capital. Better lending terms and lower interest rates – easier to borrow money. Greater potential finance from retained profits. Administration costs can be spread. Managerial Economies More specialised management can be employed, saves business money because they are more efficient. Risk-bearing Economies Large firms can afford to take risks with new products / services because other parts of the businesses are still profitable. External Economies of Scale and Dis-economies of Scale 1) External economies of scale exist when a whole industry grows and all firms benefit from falling average costs, this is more likely to happen if the industry is concentrated in a particular region.2) Businesses that work in the industry can benefit from skilled labour, this means that they will not have to spend so much money training their workforce and their training costs will therefore be lower. 3) They can also benefit from any improvements that the government is likely to make to the infrastructure in the area. If an area is doing well then the government might invest money in improving the road and rail networks or public buildings in order to support the industry.4) Thirdly, as businesses become more successful in one particular area, you will see more and more support services being created in the area or relocating to the area to support the industry that exists there. Support services that businesses might need include suppliers, distribution companies, accountants, security, cleaning services, catering services etc.5) Lastly businesses that operate in an industry might cooperate in order to share certain costs, for example expensive research and development costs, conferencing facilities, simulators etc so that all of the businesses can benefit.6) Dis-economies of scale cause average costs to rise when a firm becomes too big.7) One problem that some big organisations face is bureaucracy, this is when too many resources are used in administration and too much time is spent filling in forms and writing reports. This might result in slow decision making, poor communication and long communication channels.8) Another problem they might face involves worsening labour relations. The relationship between workers and managers may deteriorate and workers may become demotivated, this in turn may lead to conflicts which would then mean that the business wasted resources in dealing with them.9) The final dis-economy of scale that might trouble large organisations concerns management control and co-ordination. A very large business is difficult to control and organise and so therefore there may be a need for more supervision and layers of management, which will in turn raise costs. Labour Productivity Using the level of output and number of workers data please calculate the labour productivity: Output level Number of workers Labour productivity (units per worker - rounded up) 10,500 65 162 203,000 180 1128 1,100,000 750 1467 25,000 30 834 120,000 50 2400 917,000 15 61134 500,000 3 166667 Increasing Labour Productivity Match each method with its appropriate explanation point: Education and training - Government can help by investing in the system - Businesses can provide either induction, on-the-job or off-the-job Motivation of workers - Workers are more productive when they're happy - Can use financial or non-financial incentives Improve working practices - Improving the methods and systems used in the workplace - Could include changing the layout, reducing form-filling, meetings etc Increase labour flexibility - This happens when workers can do more than one job and can change jobs at short notice Downsizing - Reducing capacity (selling assets, laying off workers, closing unprofitable parts of the business) to boost efficiency Work study - Involves looking at a job very carefully and working out the most efficient way of doing it Relocation - In order to take advantage of cheaper resources such as lower rent, lower wages or cheaper transport costs Outsourcing - Giving some work to specialist companies that can do the same work at a lower cost Lean production - A modern approach to improving productivity involving a reduction in the amount of resources used.