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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
Financial
Technical / technological
Marketing
Managerial
Purchasing
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.
