Economics 3.3.3 Economies of Scale

What are Economies of Scale

advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business

What are the 6 economies of scale

1. Financial

2. Technical / technological

3. Marketing

4. Managerial

5. Purchasing

6. Risk-bearing

What are financial economies of scale

when generating additional finance is generally cheaper per £ raised for a larger firm than a smaller one as they represent lower risks.

What are technical economies of scale

when larger firms have access to better technology. This being down average costs as machinery / capital tends to be more efficient than labour and more cost effective

what are marketing economies of scale

when larger firms have greater scope to market their products more cheaply / efficiently. They can also use advertising / marketing budgets to advertise a range / variety of products.

what are managerial economies of scale

when larger firms tend to employ more specialist managers who can lead teams in certain areas of business e.g marketing/finance/distribution. For smaller firms there is less ability to specialise or focus on certain tasks

what are purchasing economies of scale

when larger firms can buy larger quantities and therefore are more likely to be given preferential treatment / bulk-buying discounts from suppliers, reducing costs per unit

what are risk-bearing economies of scale

when larger firms will likely take more risks as the costs of failure will likely be much lower as they are likely to have multiple income streams. Entrepreneurs will factor in the potential cost to the business of each venture failing when a new task is performed. The risk on average cost is much lower to larger firms 

What is the agglomeration affect

when the 'gravitational force' of the firm is so large that it makes other firms become attracted to it and 'orbit' it, decreasing its average cost

What are external economies of scale

An external economy of scale is an advantage which arises from the growth of the industry within which the firm operates, independent to the firm itself. These cause the LRAC curve to shift downwards.