Economies of scale and quality

Last time

Before we start: last time, in Costs and break-even analysis, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Bigger and better

As a business grows, its cost per unit usually falls, up to a point. And whatever its size, customers expect quality. This lesson covers economies and diseconomies of scale, and how businesses make sure their products are good enough.

Economies of scale

Economies of scale are the factors that lower average cost as a business grows larger. They let a large business charge lower prices, or earn higher profit per unit. Average cost is the cost per unit: total cost divided by output.

Five economies of scale

Here are the five internal economies of scale you should know, with how each lowers average cost.

Diseconomies of scale

Diseconomies of scale are the factors that raise average cost when a business becomes too large. Poor communication: messages pass through many levels and arrive slowly or changed. Low morale: workers feel unimportant. Slow decision-making and weak coordination between departments.

Reducing diseconomies

Split the business into smaller units, each with its own managers. Flatten the structure, and improve communication with technology and regular meetings. Involve workers in decisions to keep morale up.

Why quality matters

Quality means a product meets customers' expectations: it works, lasts, and is safe. Good quality builds a reputation and customer loyalty, and allows a higher price. Poor quality means waste, returns, complaints, lost customers, and sometimes legal action.

Quality control

Quality control checks finished products, often by inspectors testing samples, and rejects faulty ones. It stops faulty goods reaching customers. But it finds faults only after they are made, so waste has already happened, and inspectors cost money.

Quality assurance

Quality assurance checks quality at every stage of production, so faults are prevented rather than found at the end. Workers check their own work, and the business may earn a quality mark that customers trust. Total quality management makes quality every worker's responsibility, aiming for zero defects.

Control or assurance?

Here are the two approaches side by side.

Quality in services

For services, quality means good customer service: being polite, quick, and solving problems. Businesses measure it with customer surveys, reviews and complaints. Training staff is the main way to raise service quality.

Mistakes that lose marks

Mistake one: saying economies of scale lower total cost. They lower average cost. Mistake two: naming an economy of scale without explaining how it lowers cost per unit. Mistake three: mixing up quality control and quality assurance. The fix: average cost, the explanation, and the right quality method.

The full-marks tip

The full-marks tip: name the economy or diseconomy, then explain how it changes average cost. For quality, say when the checks happen and who does them.

On one card

So, on one card: scale and quality. Keep it for revision.