ECONOMIES & DISECONOMIES OF SCALE

How to introduce the topic?

A suggestion here - follow my example and draw the mathematical diagram as I have tried to do here (you will no doubt be able to improve quite easily on the visuals!) - and show by use of colours (using in my case BLUE for economies of scale and GREEN for diseconomies) - what is meant by these crucial business concepts.

I suggest that you take your time with the drawing and start only with the x and the y axes.  Ask your students what they might represent - bearing in mind that the diagram is trying to show the advantages of a business expanding its production.  This should get you to draw the curve up to its lowest point - once we have worked out what the x and the y axes represent.  Explain the key point that as output expands - the average cost of producing each car for example - is likely to fall.  Mention the more obvious purchasing economy of scale - and the likelihood of attaining a bulk-buying reduction in the price of the steel perhaps...

Next - then try to get the students to think what might happen further if output were to continue to get bigger?  If this doesn't yet get the students to come up with the correct addition to the diagram - draw the rest of the curve as it then slopes upwards again.  Ask the students to exlpain what is happening - and get them to think of potential reasons for this reaction.  Then write down a few of the more common reasons for diseconomies of scale.

A follow-on task?  Work your way through ALL of the Economies of Scale - with a leading car manufacturing company perhaps as your example...

- Purchasing Economies (already explained?)

- Financial Economies 

- Marketing Economies

- Managerial Economies

- Technical Economies

- Risk-Bearing Economies

YOUR ideas on how to teach Economies and Diseconomies of Scale?