What Are the Advantages and Disadvantages to a Firm of Operating on a Large Scale?

Topics: Economics, Economics of production, Firm Pages: 4 (1528 words) Published: July 31, 2011
Q4) what are the advantages and disadvantages to a firm of operating on a large scale? Economies of scale fall under microeconomics and are the cost advantages a business obtains due to expansion. As scale is increased they cause a producers average cost per unit to fall. Microeconomics (from Greek prefix micro- meaning "small" and "economics") is a branch of economics in which you study the behaviour of how the individual firms make decisions to allocate limited resources. Normally, it applies to markets where goods or services are being bought and sold. Microeconomics examines looks at how these decisions affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the amount supplied and quantity demanded of goods and services. Scale means big, large, massive etc. And as such gives us a clue to the nature of this topic. An economy of scale is a range of factors that can benefit large firms and allow them to have some competitive edge over their smaller rivals, and is not just about buying in bulk. In the following essay I will be exploring the advantages and disadvantages to firms of them operating on a large scale. Economies of scale occur when mass-producing a product results in a lower average cost. They can occur within a firm (internal) or within an industry (external). Internal economies of scale can be found in a firm as a consequence of mass-production. As firms produce more and more goods the average cost of the product begins to fall because of the following; technical economies created in production of the good e.g. it will most likely be cost-effective to invest in more advanced production machinery, IT and software when operating on a larger scale as these resources can be used intensively. Also specialisation when working in a large workforce, the firm is likely to divide up the work and recruit people whose skills very closely match the requirements of the job e.g. specialist accountants and...
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