Growth

• Businesses grow to benefit from economies of scale
• Internal economies of scale come from the growth of the individual firm
• External economies of scale come from the growth of an entire industry in a particular area

Businesses grow for various reasons, including the benefits of economies of scale. Internal economies of scale occur when a firm’s growth leads to lower average costs. This can be achieved through bulk purchasing, access to better technology, and spreading fixed marketing costs over a larger business. External economies of scale occur when an entire industry in a particular area experiences growth, leading to lower average costs. This can be due to improved infrastructure and attracting skilled workers. As a firm grows, its market power increases, allowing for stronger bargaining positions with customers and suppliers. Larger firms also benefit from greater brand recognition. However, there are potential drawbacks to growth, such as diseconomies of scale, which can result in rising average costs per unit. Difficulties in managing larger staff numbers, communication challenges, and a disconnect between workers and the company can contribute to this. Overtrading, when a firm grows faster than its resources can handle, can also lead to problems with cash flow and rising unit costs. Overall, while growth can lead to increased profitability, businesses must carefully manage the challenges that come with it.