Economies & Diseconomies of Scale

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  • 0:01 What Are Economies of Scale?
  • 0:49 Definition of…
  • 2:07 What Are Diseconomies…
  • 2:41 Causes of Diseconomies…
  • 4:47 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we will explore concepts related to quantity and price, focusing on economies of scale and diseconomies of scale. The lesson concludes with a summary of key information and will be followed by a short quiz.

What Are Economies of Scale?

Let's take a moment to imagine that you are the owner of a candy shop. Each day you sell multiple pieces of candy - some are gummy, some are hard, others are minty, and still others are fruity. The goal of your business is to sell lots of candy and make a profit. To reach this goal, one thing you have to consider is how much candy to order to fulfill the needs of your customers without ordering so much you end up sitting on an overstock of supply.

This is a pretty basic idea, but there's a twist. Imagine that your overall cost per piece of candy decreases the more candy that is purchased. The question then becomes, how much candy should you order? What you have just been introduced to is the concept of economies of scale.

Definition of Economies of Scale

So, what exactly is meant by the term economies of scale? Well, this is a concept that refers to when the cost per unit decreases when the quantity produced increases. In other words, economies of scale is the relationship between the quantity produced and the cost per unit. This happens because, although there are more units being produced, the initial costs are distributed over a greater quantity of goods.

Let's apply this to our candy store example. As the business owner of the candy shop, you know that an important aspect of your business is advertisement. To get the word out about your company, you use business cards to hand out while out and about in the community. While visiting your local office supply store, you let the associate know that you are comfortable ordering 100 business cards.

However, the associate tells you that the cost per business card is $1.00 when ordering 100, but if you increase your order to 200, the cost per business card decreases to $.50. This is because the costs of setting up the machines to print your business cards does not increase when you buy more. There is only one initial cost regardless of how many cards you order; therefore, you pay for the costs whether you order 100 or 200 cards.

What Are Diseconomies of Scale?

Okay, so now we know what economies of scale are and why they occur. But how does this differ from diseconomies of scale? Unlike economies of scale, which can help a business save money, diseconomies of scale is a negative occurrence that can weigh down a company. This happens when owners, like you and your candy shop, become less proficient at running their businesses as their companies begin to grow. In other words, diseconomies of scale occur when a company begins to experience breakdowns that cause the company to become less efficient.

Causes of Diseconomies of Scale

The big question you may be asking yourself right now is, why do diseconomies of scale happen? What makes a company move from economies of scale to diseconomies of scale? Here are some of the key factors that influence this transition.

1. Communication

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