Economies of Scale

Economies of scale refers to the fact that as a company becomes larger, its costs per unit of production tend to fall, making the company more competitive and more profitable. The division of labor, increased purchasing power and the specialization of internal functions are the three primary means for achieving a higher rate of return as the volume of business increases. Economies of scale are a prime motivating factor for business acquisitions and mergers. Pacific Business Advisors can help your existing businesses achieve economies of scale by assisting your business find an appropriate acquisition or merger target.

Diseconomies of scale occur when a business experiences Increasing marginal costs per additional unit of output. It is the opposite of economies of scale and usually occur only with very large businesses. Causes of diseconomies is scale include: (1) Communication requirements within large companies can be burdensome resulting in a slowing down of the production process; (2) Supervising employees become more challenging as the number of employees increase, allowing some inefficient, unproductive employees to remain unnoticed, and (3) Large companies are often burdened by the cost of multiple layers of management, resulting in excessive costs at the top of the organization.



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