GCSE Business Studies/Economies and Diseconomies of Scale

Business Size

There are a number of indicators used to determine whether a business is large or small. Some of these are:

• Number of employees: How many people are employed by the business?
• Turnover: What is the sales revenue of the business?
• Value of its assets: How much are all the possessions of the company worth?
• Physical size of the business: How many shops or warehouses does it own? How much land does it occupy?
• number of employees

Economies of Scale

Large businesses have some advantages over smaller businesses. These are known as economies of scale, and can be divided into two categories:

• Internal economies of scale: Are related only to the business itself.
• External economies of scale: Benefit the whole industry or community.

Internal Economies

Production and Technical Economies

These economies relate to the firm's production process. Some examples of these are:

• Mass production means lower unit costs.
• Able to transport materials in bulk, saving on transport costs.
• Can use computers and technology that may be too expensive for a small firm.

Purchasing and Marketing Economies

These economies relate to the firm's purchasing and marketing. Some examples of these are:

• Bulk buying means raw materials are cheaper.
• Advertising costs can be spread.

Financial Economies

These economies relate to the firm's finance. Some examples of these are:

• Easier to raise capital - better lending terms and lower interest rates.
• Risk is spread over multiple products.

External Economies

External economies are those that benefit the whole industry or community. Some of these are:

• Better road and rail networks improve the area the business is in.
• Skilled labour in the area increases.
• Other businesses, such as suppliers, are attracted to the area.
• This provides a mutual advantages to businesses in the area.