Economies and Diseconomies of Scale
How the cost of making each unit changes with size: economies of scale from buying in bulk and using bigger machines that lower average unit cost, and diseconomies of scale from poor communication and coordination that raise it when a business grows too large.
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Bigger can be cheaper, then dearer
When a business grows, the cost of making each item usually falls at first: it buys materials in bulk and can afford better machines. But if it grows too large, the cost per item can start to rise again as communication and coordination get harder. This module works through economies of scale, diseconomies of scale, and how to read average unit cost.
Scale words to know
Learn these before you weigh up the cost of growth.
The benefit against the drawback
Both come from size, but they pull the cost per unit in opposite directions.
Work it out, then judge the direction
In the exam, start by working out the average unit cost, sharing the total cost across every unit made. Then judge the direction: as output climbs, bulk buying and better machines drag the cost per unit down, but beyond a point weak communication and slow coordination push it back up. Always say whether growth is helping or hurting, and show your working.
Match the term
- economies of scale
- diseconomies of scale
- average unit cost
- purchasing economy
- cost advantages that come with growth
- rising costs when a firm gets too big
- the total cost split between the units made
- a lower price per item from buying in bulk
Match the example
- buying materials in huge quantities for less each
- affording one large, efficient machine
- managers losing track of a vast workforce
- staff feeling like a tiny part of a giant firm
- this is a purchasing economy
- this is a technical economy
- this is a diseconomy from poor coordination
- this is a diseconomy from low motivation
Which way does cost move?
When a business first grows and gains economies of scale, what happens to its average unit cost?
- It falls
- It rises
- It stays exactly the same
- It becomes zero
True about scale
Select the TWO true statements about economies and diseconomies of scale.
- Economies of scale lower the average unit cost
- Buying in bulk for a lower price each is a purchasing economy
- Diseconomies of scale lower the average unit cost
- Average unit cost is total cost times the number of units
Find the cost per unit
A factory has a total cost of 8000 pounds and makes 400 units. Divide the total cost by the number of units to find the average unit cost in pounds. What is the answer?
Order the growth story
Put the stages of a firm growing in order, from smallest to largest.
- A small firm has a high cost per unit
- It grows and buys in bulk, cutting the cost per unit
- It reaches its lowest cost per unit
- It grows too large and the cost per unit rises again
Complete the rules
Cost advantages gained as a business grows are called _____ of scale, and they make the _____ unit cost fall. If a business grows too large, _____ of scale set in and the cost per unit rises. Average unit cost is worked out by sharing the total cost between the _____ made.
Spot the economies
Tap the TWO examples of economies of scale.
- buying raw materials in bulk for a lower price each
- using one large efficient machine for all output
- managers struggling to communicate across a huge firm
- workers feeling unimportant in a giant business
Economy or diseconomy?
Read each case and decide what it shows.
- A supermarket chain buys stock in huge quantities and pays less per item than a corner shop could. What does this show?
- As a firm grows to thousands of staff, messages get lost and two departments end up doing the same job. What does this show?
- A large manufacturer can afford a specialist production line that a small rival could never pay for. What does this show?
Explain the cost of growth
Explain the difference between economies and diseconomies of scale, and how average unit cost changes as a business grows.
- Define economies of scale with an example such as buying in bulk
- Define diseconomies of scale with an example such as poor communication
- Explain how average unit cost first falls and can later rise as a firm grows