Component 1-15. Economies of scale

What is the definition of economies of scale and the equation

What is the definition of economies of scale and the equation the average unit cost of falls as output increases

Average unit cost = total cost/ output

What are internal economies of scale?

These are benefits of growth that arise from within the firm they can include purchasing economies of scale, technical economies of scale, financial economies of scale, specialisation/managerial economies of scale, and marketing economies of scale

Describe briefly each internal economy of scale

Purchasing economies of scale, when a manufacturer sells more goods, it will need more raw materials because a firm is bulk buying. It is more significant for the supplier therefore they're more likely to get discounts.

Technical economies of scale, new machinery may be less wasteful which reduces all materials being wasted. This will cut firms total costs as well as machinery can increase a firms total output.

Financial economies of scale, small firms find it difficult to obtain finance. This is because banks are less willing to lend money as they do not have the confidence they will be repaid larger firms and experienced firms are less risky and banks will have more confidence. They will be repaired. This means large businesses may get the same loan with lower interest rates.

Specialisation and managerial economies of scale, better managers are more productive. Larger firms will be able to employ more specialist managers and we know how to get the best for you for each pound spent this will improve efficiency and reduced total cost.

Marketing economies of scale, more effective advertising as a firm grows each pound spent is likely to of greater benefit for example, if a small business spends the same amount of money on advertising as a big business it will not gain for more customers as the big business

What are external economies of scale?

These are external factors to a business that can help achieve our reduction in average costs include financial services, education, and supplier

Briefly describe each external colonies of scale

Financial economies, they can be used to offer beneficial services to particular industries offering reduction cost benefits, e.g.debt factory business services offering more competitive terms to industry renowned cash flow problems

Educational economies, local colleges and educational facilities will be set up in areas where large number of similar and specialise businesses are established. Then provide highly skilled labour that requires less recruitment and training cost.

Supplier economies, suppliers can be attracted to areas where a large number of successful businesses are located

What is diseconomies of scale?

diseconomies occur when the average costs of production increases as the scale of production increase

Briefly describe internal diseconomies of scale

Poor communication, as a firm grows communication becomes more difficult and messages may be distorted in taller hierarchies or wider span of control. This may lead to inefficiency and misunderstandings.

poor coordination, it becomes difficult to co-ordinate actions of hundreds

Poor motivation, as workers become part of a larger workforce they may feel more insignificant as it is more difficult satisfying more workers which may result decrease

Technical diseconomies, for example the breakdown of a mass production line in a huge plant has more serious implications than if several small machines were used