Page 223 - Cambridge IGCSE Business Studies

16: Costs, scale of production and break-even analysis

Poor communication
If a business becomes too large, managers may no longer be able to communicate
directly with workers. This can lead to slow and poor decision-making and an

increase in mistakes.

Demotivation of workers
In very large businesses, managers may no longer have day-to-day contact with

workers. This can lead to demotivation as workers feel that they are no longer a
Productivity: see Chapter 15,
page 204. valued part of the business. Demotivation can lead to high labour turnover, poor
quality and a fall in productivity.

Poor control
As a business grows, so too will the number of departments, products
Quality: see Chapter 17,

and production units. The control and coordination of these can present
page 229.
managers with many problems, especially where production units are

located in other countries. The business’s average costs may rise as a result
of managers in different departments or different production units working

towards different objectives. Also, there is a greater risk that work will be

duplicated and this, of course, is a waste of resources and increases costs
EXPLORE!
unnecessarily.
Choose two businesses close
to your school which are in the
same industry. One business
should be small and the other 221
much larger, for example a local Poor
shop and a supermarket. communication
1 Compare the two businesses
and identify how the larger
one might benefit from
economies of scale.
2 How does the size of each

business affect the range of
Diseconomies
goods or services off ered and of scale
the prices they charge?
3 Why do you think the smaller
business is able to compete in Poor managerial Demotivated
the same market as the larger control workers
business?

Figure 16.3 Diseconomies of scale

The importance of economies and diseconomies of scale
Economies of scale reduce average costs and diseconomies of scale increase average
costs. The relationship between average costs and scale of operation is shown in

Figure 16.4, page 222.