[Microeconomics] Economies of Scale

Internal Economies of Scale

Technical EOS: Indivisibilities
- Machines have fixed capacity.
- Regardless of amount of output produced by firm, the firm still has to utilize these machines.
- For firms with smaller output, there may be under-utilization of the capital.
- Larger firms are more able to spread the cost across a higher output level, thereby lowering LRAC.
Eg. Supermarket chains such as NTUC and Giant can invest in technology that improves stock control. It is not cost efficient/viable for smaller provision shops to purchase such a technology.

Technical EOS: Specialization of Labour
- In a large [state nature of firm] firm which has different stages of production/roles - [state the stages of production/roles] - it allows workers with specific skills to be deployed to different stages/roles of [state what the firm does].
- By performing and focusing on the same task, the specialized labour can become very skilled and perform the task with speed and efficiency.
- Less training time required, less time wasted by workers transferring from one task to another, raising the productivity of the inputs used.
- Increasing Returns-to-scale (RTS), where an increase in input leads to a more than proportionate increase in output of the firm. This lowers LRAC.
Eg. Bicycle manufacturing firm has several stages of production: bike frame manufacture, assembly of bicycle, safety testing
Eg. Yoga studio has several roles: Yoga instructors, administrative staff (liaise with instructors/students, settle school fees, manage advertising) 

Financial EOS

- Larger firms have more physical assets to offer as collateral.
- In the event that the borrower defaults the loan, the bank can receive the collateral as payment, hence deem large firms as low risk borrowers.
- As banks are more willing to lend them money at lower interest rates, the firm's cost of borrowing will decrease. Subsequently, LRAC decreases.
*Small firms, such as GP, will find it inefficient to specialize labour resources. It is inefficient to have doctors specializing in different illnesses.

Marketing EOS

- Large firms can capitalize on its bargaining power to bulk buy its equipment at favourable rates, which can substantially reduce the cost of each unit purchased. LRAC decreases as output increases.
Eg. Bike firm buys steel from steelmakers. GP clinic cannot bulk buy as they need a small quantity of materials.

-Large firms can afford national advertising campaigns to gain publicity. They can spread the high advertising costs over a large output, thereby lowering LRAC.
Eg. Bike firms can advertise and promote their bikes through sponsorship of world events.

Organisational EOS

- Cost savings may be enjoyed when the employment of the best managers is spread out across a larger output, increasing efficiency and decreasing the cost per unit of output.
Eg. Centralised administration of the firm: HR department can administer all the wages. In a merger, only 1 finance department is needed.

Managerial EOS

- As a firm grows, there is greater potential for managers to specialize in particular tasks. Large scale manufacturers employ specialists to supervise production systems. With better management, productivity increases, lowering LRAC.

Risk-Bearing EOS

- Large firms can diversify its risks more efficiently due to its larger scale of operation and thus is more likely to have enough resources to deal with potential contingencies.
- For firms that operate in several markets, losses in one market can be overcome by gains in another market. This reduces LRAC associated with uncertainty.
Eg. When DD in one market falls, excess stocks can be sold in another market to cut back on storage costs.

Economies of Scope

- Large firms often produce a range of products. Each individual product is being produced more cheaply than if it was produced in a single-product firm.
- EOSc allows various overhead costs, M/F/O economies to be shared among the various products.
Eg. A firm that produces a whole range of CD players, amplifiers and tuners can benefit from the bulk purchase of electronic components. By sharing marketing and distribution costs, LRAC decreases. 
Eg. Large yoga studios offer a range of services. Overhead costs such as rental can be shared among many services offered, thus lowering LRAC. 

Internal Diseconomies of Scale

Loss of Control

- Difficult to manage performance of employees in large firm.
- Loss of morale may lead to decreased productivity and lowers the quality of products produced. This increases LRAC.
Eg. When yoga instructors feel unmotivated, they may turn up for classes late. Customers may be dissatisfied with the service provided and quit the yoga classes. Inefficiency and decreased productivity will lead to an increase in LRAC. 
Eg. It is difficult to monitor the use of factor inputs, such as malt barley, a key ingredient in the brewing of beer. The lack of supervision may cause these factor inputs to not be effectively utilised, thereby increasing wastage and increasing LRAC.

Lack of communication

- Larger firms have longer lines of communication and a more complex bureaucratic structure, thus the task of coordinating their activities becomes increasingly difficult.
- It's difficult to ensure that all employees get the necessary information.
- Delays in one part of production will have greater repercussions [state examples] as compared to smaller firms. This leads to inefficiency and higher LRAC.

External Economies of Scale

Economies of Concentration: Trained workforce

- As the industry expands, the DD for labour with the necessary skillsets increase.
- Training schools may be set up to provide training and education, which means that a pool of skilled workers is readily available.
- Hence, individual firms do not need to provide additional training as the manpower they hire already acquire the requisite skills, reducing training and search costs for the firm, thereby lowering it's LRAC.

Economies of Concentration: Better Industry Infrastructure

- Due to concentration of industry, facilities such as better transport, baking and telecommunication systems may be set up to serve the needs of the industry.
- Greater access to clusters of supply goods can help to lower operating costs.
- Also, when different firms in the industry share usage of special equipment instead of buying their own, they are able to reduce logistics costs, thus helping them to lower their LRAC.
Eg. Firms in the biomedical hub Biopolis can share facilities. Nearby educational institutes such as SP and NUS can provide specialized education and training to meet the needs of the biomedical industry,  

Economies of Information

- Firms are able to get info from other firms or external vendors, such as trade associations or central research centres.
- They can obtain up-to-date info on production cheaply by sharing the costs of research instead of spending heavily on costly independent research.