Economies and Diseconomies of Scale

Dear Lester,
The decision to move AutoEdge’s Manufacturing Plant to the United States requires
consideration for operational efficiency. Such efficiency may be achieved when the organization
can reduce operational costs while increasing its revenues. This email explains the economic
concepts of the economies and diseconomies of scale. Also, it includes ways that AutoEdge may
use to evaluate whether or not the organization is achieving economies or diseconomies of scale.
The economies of scale are the benefits that accrue to an organization due to producing
goods or services on a large scale. To enjoy economies of scale, AutoEdge would have to reduce
its long-run average costs and, at the same time, increase its revenues (Young et al., 2014). For
example, if AutoEdge’s marketing activities result in increased demand for its parts and a
subsequent increase in market share, it would have to increase its production to meet the new
higher demands. Large-scale production would put AutoEdge in a position to negotiate for better
prices of production inputs from suppliers. AutoEdge is better placed to negotiate for debt
funding from lenders and financial intuitions with increased production.
Additionally, there are costs that AutoEdge would be able to retain as constant even with
increased production. For example, AutoEdge would not need to increase its marketing or
research and development budgets. AutoEdge may be able to procure production machinery that
provides better price-performance ratios such that the machinery allows for an increase in
production capacity that surpasses the purchase price.
The scenario where AutoEdge’s long-run average costs increase with an increase in
revenues is defined as diseconomies of scale (Young et al., 2014). AutoEdge may experience

diseconomies of scale that increase with revenues. For example, one of the production inputs that
AutoEdge uses may be in high demand and, therefore, could increase the price. As such,
AutoEdge would still have to purchase high input quantities to maintain the increased output
while still paying the high price of the input, leading to diseconomies of scale. Another example
would be an increase in transportation costs. If AutoEdge increases its production capacity and
transportation costs increase, it could result in diseconomies of scale. Transportation costs
include logistics, handling, freight insurance, security, and inventory costs. If AutoEdge had
increased market share and acquired customers in areas where it never used to ship its parts
previously, the costs of transporting to those areas would be new and would cause an increase in
the average total cost.
In the long and short run, AutoEdge should seek to increase economies of scale by
reducing costs. Efficiency would ensure better use of capital and financial resources to help the
organization become more profitable. Economies of scale would ensure that AutoEdge gets a
favorable return on capital invested, laying the foundation for better growth and expansion.
Additionally, economies of scale would help the organization become more competitive in the
parts industry.
In conclusion, it may be more profitable to increase revenues and reduce costs through
cost savings in inputs, indirect costs such as marketing and research, cheaper access to
production-related capital, and better price-performance ratios for equipment. I hope that this
email answers the questions you had about economies and diseconomies of scale.

References
Young, P. K., Erfle, S., & Keat, P. G. (2014). Managerial Economics (7th Edition). Pearson
Education (US). https://coloradotech.vitalsource.com/books/9780133560329