What is the difference between economies of scale and diseconomies of scale and what are the reasons for using each? How do you purchase these types of economies?
Economies of Scale vs Diseconomies of Scale
Economies of scale and diseconomies of scale are related concepts and are the exact opposites of one another. Economies of scale arise when the cost per unit reduces as more units are produced, and diseconomies of scale arise, when the cost per unit increases as more units are produced. A firm constantly aims to obtain economies of scale, and must find the production level at which economies of scale turns to diseconomies of scale.
• Economies of scale and diseconomies of scale are concepts that go hand in hand. They both refer to changes in the cost of output as a result of the changes in the levels of output.
• A company would have achieved economies of scale when the cost per unit reduces as a result of an expansion in the firm’s operations.
• Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale, at which the cost per unit rises as more units are produced.
Purchasing these types of economies: As we stressed previously in the discussion of economies of scale, changing input prices cannot be the cause of scale economies or diseconomies because, quite simply, input prices remain constant along any particular LAC curve. So what does happen to a firm’s long-run costs when input prices change? As it turns out, the answer depends on the cause of the input price change. In many instances, managers of individual firms have no control over input prices, as happens when input prices are set by the forces of demand and supply in resource markets. A decrease in the world price of crude oil, for example, causes a petroleum refiner’s long-run average cost curve to shift downward at every level of output of refined product. In other cases, managers as a group may influence input prices by expanding an entire industry’s production level, which, in turn, significantly increases the demand and prices for some inputs.
Sometimes, however, a purchasing manager for an individual firm may obtain lower input prices as the firm expands its production level. Purchasing economies of scale arise when large-scale purchasing of raw materials—or any other input, for that matter—enables large buyers to obtain lower input prices through quantity discounts. At the threshold level of output where a firm buys enough of an input to qualify for quantity discounting, the firm’s LAC curve shifts downward. Purchasing economies are common for advertising media, some raw materials, and energy supplies.