Economics, 3rd Edition

Causes of Economies and Diseconomies of Scale 

What might cause economies or diseconomies of 

scale? Economies of scale often arise because higher production levels allow specialization among work-

ers and increase the possibility that technology can be used, which permits each worker to become better 

at his or her assigned tasks. For instance, modern assembly line production for furniture may require 

fewer workers in relation to the technology used but still produce more furniture. If a furniture manufac-

turer was producing only a small quantity of output, it could not take advantage of this approach and would 

have higher average total cost.

In addition to reasons of more effective use of technology, firms operating at larger scale can also gain 

advantages by being in a position to negotiate more favourable borrowing rates or can secure lower supply 

costs because they are buying in larger quantities and can agree discounts from suppliers.

There are also advantages to larger firms from external sources which are to do with the growth of 

the industry as a whole rather than the increase in the scale of operation. Some firms are located in 

areas where there is a supply of skilled labour or which has a reputation which can benefit the firm. 

The development of local infrastructure may also give the firm advantages which all lead to lower unit 

costs.