### 날짜 : 2024-04-10 13:37 ### 주제 : Economies and Diseconomies of Scale #economics ---- > Economies of scale and diseconomies of scale are concepts that explain the relationship between the scale of production and the average cost of each unit of output. ### Economies of Scale Economies of scale occur when increasing the scale of production leads to a decrease in the average cost of each unit produced. This typically happens due to several factors: 1. **Specialization:** As production scales up, workers and machinery can become more specialized, increasing efficiency and productivity. 2. **Spreading Fixed Costs:** Fixed costs, such as rent, management salaries, and machinery, are spread over a larger number of units, reducing the average cost per unit. 3. **Bulk Buying:** Larger scale often allows the firm to purchase materials in bulk, benefiting from discounts due to higher volume purchases. 4. **Technological Advantages:** Larger production scales can justify investment in more efficient technologies which would not be cost-effective for smaller operations. 5. **Improved Bargaining Power:** Larger firms have more market power and can negotiate better terms with suppliers and distributors. 6. **Network Economies:** In some industries, the value of a product or service increases as the number of users increases (e.g., telecommunications). Economies of scale can be categorized into two types: - **Internal Economies of Scale:** These are cost-saving benefits that accrue to a firm independently of the industry. Internal economies of scale can result from technical improvements, managerial efficiencies, financial capabilities, marketing strengths, or access to large networks. - **External Economies of Scale:** These occur outside of a firm but within an industry. They can result from industry-focused developments such as improved infrastructure, access to skilled labour due to education improvements in the area, or industry-specific research and development. ### Diseconomies of Scale On the other hand, diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs. They often kick in beyond a certain point of production when the disadvantages of operating a large enterprise outweigh the advantages. Factors contributing to diseconomies of scale include: 1. **Communication Problems:** As firms grow, it can become harder to communicate effectively across the entire organization, leading to inefficiencies. 2. **Complexity and Bureaucracy:** Large organizations can become overly complex and bureaucratic, leading to slow decision-making and increased costs. 3. **Worker Alienation:** In very large firms, employees might feel undervalued or disconnected from the goals of the organization, which can lower productivity and increase labour costs. 4. **Operational Inefficiencies:** Larger firms might experience operational inefficiencies due to challenges in coordinating and monitoring different departments or regions. 5. **Supply Issues:** For companies requiring large amounts of raw materials, sourcing them can become difficult and more expensive as production scales. 6. **Innovation Stifling:** Large firms could potentially become less innovative due to their established nature, leading to higher costs associated with older, less efficient techniques. Understanding economies and diseconomies of scale is important in the medical industry, as healthcare providers often look for ways to reduce costs without sacrificing the quality of care. For instance, a hospital system might achieve economies of scale by centralizing certain services, purchasing supplies in bulk, or standardizing care protocols. But if the hospital system becomes too large, it might face diseconomies of scale if it struggles with coordination of care, responsiveness to patients, or administrative overhead. Therefore, healthcare providers must carefully manage growth to avoid becoming inefficient. They must ensure that the scale increases actually lead to cost savings per unit and not to increased complexity that makes providing care more costly or less effective. Let's consider a hospital as an example to illustrate economies and diseconomies of scale in the medical industry. ### Economies of Scale Example: Suppose a hospital, Sunrise Health, has been operating with 100 beds and decides to expand to a 200-bed facility. Here’s how it might experience economies of scale: 1. **Specialized Staff:** Initially, doctors and nurses may have had to perform a variety of tasks. With expansion, staff can specialize according to their expertise, leading to more efficient care delivery (e.g., creation of specialized units like cardiology, oncology). 2. **Bulk Purchasing:** Sunrise Health previously bought medical supplies in small quantities. With more beds and more patients, they can order supplies in larger quantities, negotiating lower prices per unit, thereby reducing the average cost of medical supplies per patient. 3. **Spreading Fixed Costs:** Fixed costs such as administrative salaries, the cost of medical equipment, and building maintenance are now spread over more patients, reducing the cost per patient. For instance, the cost of a CT scanner is amortized over a larger number of scans. 4. **Enhanced Bargaining Power:** With a larger operation, Sunrise Health can negotiate better rates with insurance companies because they offer a wide range of services to a larger patient base. 5. **Technological Investment:** The hospital can now justify investing in more advanced medical technology that improves efficiency due to their higher patient volume. Also, they could invest in an integrated electronic health records system, which improves patient tracking and reduces errors. ### Diseconomies of Scale Example: After some years, Sunrise Health has grown into a 1000-bed facility. Yet, they are noticing that some costs per patient are increasing, signaling diseconomies of scale: 1. **Communication Issues:** The chain of command has become longer, and the communication between departments is now less efficient. Essential information about patient care sometimes gets delayed, complicating treatment plans. 2. **Bureaucratic Red Tape:** To manage its large staff, Sunrise Health had to implement more administrative layers. Approval processes for new procedures or purchases are now slow, hampering the hospital's ability to adapt quickly to new medical procedures or emergency situations. 3. **Employee Disconnection:** Nurses and doctors feel less connected to the hospital's mission due to its size; they don't see the impact of their individual effort on overall hospital success, leading to a slight decrease in morale and productivity. 4. **Scheduling Complexities:** Operating rooms and diagnostic equipment like MRIs are now used more intensively. With more complex scheduling required, sometimes equipment is unavailable when needed, delaying treatments and leading to a backlog of cases. 5. **Supply Inefficiencies:** Despite buying supplies in bulk, managing the inventory for such a large operation has become complex, leading to either overstocking (with higher carrying costs) or shortages that can delay treatments. 6. **Quality of Care Concerns:** Rapid expansion has led to difficulty in maintaining consistent care standards across the facility. The hospital may struggle to uphold the quality that made it successful initially due to the standardization challenges. In these ways, Sunrise Health is experiencing diseconomies of scale, where the increase in the size of the hospital operations is leading to an increase in the average costs. At this point, managerial insight is crucial to determine whether scaling back certain operations, improving internal communication systems, decentralizing some decision-making, or taking other corrective actions would help in returning to an optimal scale of operation.