Economies of Scale

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4 Terms

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Economies of scale

  • as business grows, it can benefit from reduction in average cost of production, distribution + sales

  • Gives larger businesses competitive advantage over smaller one

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Average costs

  • average cost of producing 1 unit of output

  • AC = Total cost/number of units produced (output)

  • must charge higher price than AC to make profit

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Purchasing economies of scale

as business grows it can purchase raw materials/components in bulk, can enjoy savings on these bulk buy purchases

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Technical economies of scale

as business grows it can purchase more sophisticated machinery/equipment to make it more efficient, also larger premises to produce/supply/distribute more