Study Notes
Economies of scale occur when the average cost of production decreases as a business grows, while diseconomies of scale occur when these costs increase as the business becomes too large.
- Internal economies of scale — cost advantages that arise from within the company. Example: Purchasing economies of scale occur when large firms obtain discounts through bulk buying.
- External economies of scale — cost advantages that arise from external factors. Example: Skilled labour becomes available when an industry is concentrated in one area.
- Diseconomies of scale — factors that cause the average cost of production to rise as business size increases. Example: Bureaucracy increases as a business grows, leading to inefficiencies.
Exam Tips
Key Definitions to Remember
- Economies of scale
- Diseconomies of scale
- Internal economies of scale
- External economies of scale
Common Confusions
- Confusing internal and external economies of scale
- Misunderstanding how diseconomies of scale increase costs
Typical Exam Questions
- What are economies of scale? Economies of scale are cost advantages that a business obtains due to expansion.
- How do internal economies of scale differ from external economies of scale? Internal economies of scale arise from within the company, while external economies arise from external factors.
- What is a diseconomy of scale? A diseconomy of scale is when increased production leads to higher average costs.
What Examiners Usually Test
- Understanding of different types of economies and diseconomies of scale
- Ability to provide examples of internal and external economies of scale
- Explanation of how diseconomies of scale can limit business growth