Page 224 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 4 Operations management

Average Cost

Diseconomies of Scale

Economies of Scale
Output
Q*
Figure 16.4 Average cost curve showing economies and
diseconomies of scale

You can see that as output increases, unit costs fall and continue to do so until
diseconomies of scale occur and the unit costs begin to rise. The ‘best’ scale of

operation is where unit costs are at their lowest – the bottom of the curve at the
point Q.
The fact that most businesses will eventually experience diseconomies of scale,

as the scale of operation grows, explains why most industries are not dominated by
just one or a few fi rms.
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TEST YOURSELF
1 Explain the importance to a business of economies of scale.
2 Explain how a business could experience diseconomies of scale.

CASE STUDY ‘You need it, we’ve got it!’

Nakumatt Holdings Limited is East Africa’s leading supermarket chain. The company was established in 1987 and
since then has grown to over 40 stores in Kenya, Uganda, Rwanda and Tanzania. The company has plans to continue its
expansion into the wider East Africa region.
Nakumatt’s store formats range from convenience stores and supermarkets to hypermarkets that showcase distinct

world-class shopping floor layouts and amenities. All branches hold a range of over 50,000 quality products.
Source: www.nakumatt.co.ke

TASK
a Identify and explain three economies of scale Nakumatt Holdings Limited may have achieved as a result of its
expansion since 1987.
b Explain how the expansion of Nakumatt Holdings might benefit consumers.
c If Nakumatt continues to expand why might it experience diseconomies of scale?