Economies and Diseconomies of Scale
This chapter focuses on long run costs, the effect of economies of scale on unit costs and the
effects of economies of scale on prices and competition in markets.
What are economies of scale?
Economies of scale are the cost advantages that
a business can exploit by expanding their scale
of production in the long run.
The effect is to reduce the long run average
(unit) costs of production.
These lower costs are an improvement in
productive efficiency and can benefit consumers
in the form of lower prices. But they can also
give a business a competitive advantage too!
Long Run Output (units per month)
Total Costs (£s)
Long Run Average Cost (£s per unit)
1,000
8,500
8.5
2,000
15,000
7.5
5,000
36,000
7.2
10,000
65,000
6.5
20,000
120,000
6.0
50,000
280,000
5.6
100,000
490,000
4.9
500,000
2,300,000
4.6
There are many different types of economy of scale and depending on the particular
characteristics of an industry, some are more important than others.
• Why can you now buy high-performance personal computers for just a few hundred
pounds when a similar computer might have cost you over £2000 just a few years
ago?
• Why is it that the average price of digital cameras is falling all the time?
The answer is that scale economies have brought down the unit costs of production and
feeding through to lower prices for consumers.
Internal economies of scale
Internal economies of scale arise from the growth of the business itself. Examples include:
1. Technical economies of scale:
a. Large-scale businesses can afford to invest in expensive and specialist capital
machinery. For example, a supermarket chain such as Tesco or Sainsbury can
invest in technology that improves stock control. It might not, however, be viable
or cost-efficient for a small corner shop to buy this technology.
