Like two sides of the same coin, economies of scale
and diseconomies of scale co-exist within a business, industry, city, state, nation
and just about any organization.
What
does scale here mean?
Traditionally, scale refers to products produced on
some mass level.
Economies of Scale
In simple terms, ECONOMIES of scale refer to the idea that as more products are
produced the marginal cost (Extra cost), or cost per unit, decreases because of
increased efficiencies. Often the desire for economies of scale drives an
organization to become larger or to merge with a like-minded company, which can
bring additional efficiencies or opportunities.
But economies
of scale have their limits. When this limit is reached it causes a
disadvantage, the disadvantage is called diseconomies of scale.
Diseconomies of Scale
Diseconomies of scale come about when a business or
organization becomes so big, or so inefficient, that the cost-per-unit of its
products and services starts to rise a business can only grow so much before
the benefits of growth begin to create additional costs and resources for
example when organisation becomes so large and needs to employ more staff, its
cost tends to increase as the company increases.
Factors causing economies and diseconomies of
scale
Economies and diseconomies of scale are frequently
broken down by the respective factors leading to a certain level of scale. Some
factors are internal, while other factors come from outside the business. Internal
factors such as technology, unique training methods, while
external factors such as higher interest rates, government regulation or
consumer ambivalence can create difficult diseconomies of scale.
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