Answer:

Factors leading to Economies of Scale in a manufacturing industry:

• Specialisation of Labour: Specialising different parts of the manufacturing process can increase efficiency.
• Technological Advancements: Investing in advanced machinery and automation can significantly reduce per-unit costs.
• Bulk Purchasing of Materials: Negotiating lower prices for raw materials due to large order volumes.
• Improved Production Processes: Implementing more efficient production methods (e.g., lean manufacturing) can reduce waste and increase output.
• Spreading Fixed Costs: Fixed costs (e.g., factory rent, equipment depreciation) are spread over a larger number of units as production increases, lowering the average cost.

Factors leading to Diseconomies of Scale in a manufacturing industry:

• Coordination Problems: Managing a large and complex manufacturing operation can be challenging, leading to delays and inefficiencies.
• Communication Difficulties: Communication between different departments and levels of management can become slow and ineffective.
• Motivation Problems: Workers may feel less valued and motivated in a large, impersonal organisation.
• Bureaucracy: Increased bureaucracy and red tape can slow down decision-making and increase costs.
• Quality Control Issues: Maintaining consistent quality across a large production volume can be difficult.

Table illustrating potential changes in Average Costs:

The optimal scale of production is where the average cost is at its lowest point.

Answer:

Economies of Scale occur when the average cost of production falls as output increases. This happens because fixed costs are spread over a larger number of units. For the bakery, this could manifest in several ways:

• Specialisation of Labour: As the bakery grows, it can employ workers to specialise in specific tasks (e.g., one person kneading dough, another decorating cakes). This increases efficiency and output per worker.
• Technological Improvements: Larger bakeries can afford to invest in more efficient machinery like automated mixers and ovens. This reduces labour costs and increases production speed.
• Bulk Purchasing: A larger bakery can negotiate better prices for ingredients (flour, sugar, etc.) due to bulk purchasing. This lowers the cost of raw materials.
• Improved Distribution: A larger bakery can establish its own delivery system or use more efficient transport methods, reducing distribution costs per unit.

However, at some point, diseconomies of scale can set in. This happens when the average cost of production starts to rise as output increases. For the bakery, this could be due to:

• Coordination Problems: As the bakery grows, managing a larger workforce becomes more complex. Communication breakdowns and coordination difficulties can lead to delays and errors.
• Management Difficulties: It becomes harder for managers to oversee a larger operation and maintain control over quality and efficiency.
• Motivation Problems: Workers may feel alienated or less motivated in a large, impersonal organisation. This can lead to lower productivity and higher staff turnover.

Therefore, while economies of scale can initially lower costs, the bakery needs to carefully manage its growth to avoid diseconomies of scale. The optimal scale of production is where the lowest average cost is achieved.

Governments often implement policies to foster the growth of small firms, recognizing their importance for economic dynamism and job creation. These policies typically aim to address the challenges small firms face, such as access to finance and information. Here are some examples:

• Financial Assistance: Governments can provide grants, loans, and loan guarantees to help small firms overcome funding barriers. For example, government-backed loan schemes can reduce the risk for banks lending to small businesses.
• Reduced Tax Burden: Offering tax breaks or reduced rates of corporation tax can improve the profitability of small firms, encouraging investment and expansion. This can be particularly effective for new businesses.
• Simplification of Regulations: Reducing bureaucratic hurdles and simplifying regulations can lower the cost of compliance for small firms, freeing up resources for other activities. This might involve streamlining licensing processes or reducing administrative burdens.
• Training and Support Services: Providing access to business training, mentoring, and consultancy services can equip small firm owners with the skills and knowledge needed to succeed. Government-funded business incubators and accelerators fall into this category.
• Promoting Export Opportunities: Governments can support small firms in accessing export markets through export promotion agencies, trade missions, and export financing schemes. This helps them expand their customer base and increase revenue.

These policies are designed to create a more supportive environment for small firms, enabling them to compete effectively and contribute to economic growth. The effectiveness of each policy depends on the specific context and the needs of the target firms.