1.5.1—Economies and diseconomies of scale

Internal economies lower long-run average cost as output rises; diseconomies raise it when coordination or control becomes harder. External economies/diseconomies come from the surrounding industry, not from the firm alone.

Scale changes average cost through purchasing, technical, managerial, financial and marketing effects. The benefit stops when complexity, communication or motivation costs grow faster than the saving. External changes affect several firms in the same location or industry.

Compare average cost before and after growth, identify the source of the change, and state the condition that limits the scale benefit.

A bakery chain buys ingredients in bulk and spreads a manager's cost across more loaves, so unit cost falls. If ten branches then need slow layers of approval, coordination cost pushes average cost up: the same growth can move from economy to diseconomy.

A bigger firm is not automatically more efficient; scale is useful only if the relevant cost per unit falls.