4.1.4.5 Economies and diseconomies of scale

economies of scale

when a firm produces more and the average cost per unit falls

TC/Q

formula for average cost or ATC

specialise, efficient, same, more

economies of scale occur when workers can __________ in certain tasks and be more ________, hence the ____ number of workers can produce _____ output.

fixed costs are spread over more units as output increases

What allows the average cost per unit to fall in economies of scale?

long run average cost(LRAC)

made up of the lowest points on many short run average cost curves(SRAC)

cheapest cost of producing each level of output in the long run

What does the LRAC show?

down, specialisation

When the LRAC slopes ____ it shows economies of scale from ___________

technical, managerial, purchasing, risk-bearing, financial, marketing

What causes of Economies of Scale?

technical EofS

occurs when bigger firms can use better machines or production methods

• Large-scale production allows the use of advanced technology which small firms cannot afford

big factories can buy robots => more efficient => cost of robots is high but spread across thousands of cars => cost per car becomes small

Application for technical EofS

car making, steel, or energy, where specialised equipment increase productivity

technical economies are especially vital in industries such as 

output rises, ATC falls => helping firms compete more effectively

Analyses for technical EofS

Managerial EofS

when large firms employ specialist manager for different jobs(i.e. production, finance market)

Tesco

Application for Managerial EofS

Each manager build expertise in their area => firm more efficient / small firms =>less effective => only rely on 1-2 people — cost of manager spread across large output, => ATC falls

Analyses for Managerial EofS

Purchasing EofS

when a large firm buys raw materials or stock in bulk and suppliers give discounts

Primark = > orders millions of item at once and pays less per unit

Application for Purchasing EofS

Bulk buying => reduces cost per unit => one large order cheaper than buying many small ones => cost advantage over small firms => explains why supermarket and large chain dominate in competitive markets

Analyses for Purchasing EofS

financial EofS

when large firms can borrow money more easily and at a lower interest rate.

• Banks see big firms as safer as they have assets and good reputation

Apple can borrow billions at a low interest rate, while small start up must pay higher rates or may even be refused a loan

Application for Financial EofS

lower borrowing costs => helps large firms keep ATC lower => large firm can expand/invest in new projects more cheaply(sell shares in stock market, which small firms can’t do)

Analyses of Financial EofS

Marketing EofS

when advertising or promotion costs are spread over a large output

Coca-Cola pays for global ad campaigns => TC is high but spread across billions of cans sold => ATC is low

Application for Marketing EofS

large firms may use reputation to negotiate cheaper shelf space or better advertising deals => advantage over small firms in attracting customers while keeping ATC per unit low

Analyses for Marketing EofS

Risk-bearing EofS

when large firms can spread risks across many products, markets or regions

Unilever makes food, cleaning, and personal care products

application for Risk-Bearing EofS

large firms operate in many countries => one market slows another can support the firm => less uncertainty and more confident planning => decreased ATC since loses are balanced out by gains

Analyses for Risk-bearing EofS