Economies and Diseconomies of Scale — Costs & Revenue of a Firm | IGCSE Economics

Exam Frequency Analysis

Past paper frequency (2018 to 2024)

This topic accounts for approximately 10% of your exam marks.

stable

Medium

Stable10%

Fixed vs variable costs, profit calculations, and average cost appear regularly across both Section A and Section B questions.

U-shaped LRAC curve: average cost falls through economies of scale, then rises through diseconomies past the minimum efficient scale

As a firm gets larger, its average cost typically falls for a while and then, beyond some point, starts to rise. Two opposing forces are at work.

Economies of scale are the fall in long-run average cost that a firm enjoys as it grows in size and output.

Diseconomies of scale are the rise in long-run average cost that a firm suffers once it becomes too large to run efficiently.

The point on the long-run average-cost curve where economies stop and diseconomies begin is sometimes called the minimum efficient scale (MES).

Internal economies of scale

These are cost savings the firm captures as it grows. The IGCSE syllabus lists six.

Type	What it is
Technical	Larger machines, specialised production lines, longer production runs that lower unit cost (e.g. a car assembly line that makes 1,000 cars a day has far lower unit cost than a workshop making 5 a day).
Financial	Big firms can borrow at lower interest rates (banks see them as lower risk) and can issue shares; small firms pay more for finance.
Marketing	Advertising and branding spread across millions of units of output; the cost per unit sold is tiny.
Managerial	Large firms can hire specialist managers for finance, marketing, HR, operations. Small firms have one owner doing everything badly.
Purchasing	Bulk-buying discounts when a firm orders raw materials in huge quantities.
Risk-bearing	Large firms diversify across products, markets and regions; a bad year in one area is offset by a good year in another.

Internal diseconomies of scale

Once a firm passes the MES, several problems begin to drive average cost back up.

Type	What goes wrong
Communication	Messages get distorted as they pass through more layers of management; decisions are based on partial or wrong information.
Coordination	A huge firm with many factories, departments and divisions struggles to keep everyone working toward the same goal.
Motivation	Individual workers feel like a tiny cog in a giant machine; productivity falls.
Control	Senior managers cannot oversee everything; sub-divisions develop their own (sometimes inefficient) practices.