Economies of Scale

What are economies of scale?

Economies of scale arise when unit costs fall as output increases

What is the equation for economies of scale?

Total production costs in period (£)/ Total output in period (units)

What are the internal economies of scale?

• Arise from the increased output of the business itself

  • Buying economies: Buying in greater quantities usually results in a lower price (bulk-buying)

  • Technical: Use of specialist equipment or processes to boost productivity

  • Marketing: Spreading a fixed marketing spend over a larger range of products, markets and customers

  • Network: Adding extra customers

  • Financial: Larger firms benefit from access to more and cheaper finance

What are external economies of scale?

• Occur within an industry: i.e. all competitors benefit

  • Arise from the industry as a whole- i.e. all competitors benefit

  • Often associated with particular geographic areas

    • E.g. Creative and media in London

What are the examples of economies of scales?

• Having many specialist suppliers close by

• Access to research and development facilities

• The pool of skilled labour to choose from