What are Economies of Scale:

• Economies of scale arise when unit costs fall as output increases

How to calculate Economies of Scale:

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

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

Purchasing (bulk buying):

• A purchasing economy of scale is the benefit that a business receives from purchasing large volumes of a good

• The supplier is incentivised to offer a discount as the scale of the purchase is substantial

• The lower costs allow a business to either lower their selling prices to consumers (increasing competitiveness) or maximise their profits (benefiting shareholders)

Financial economies:

• As a business grows in scale so it acquires more assets

• Assets can be used as security against any kind of financial borrowing. This reduces the risk for the lender

• With a lower level of risk, lenders are prepared to offer larger businesses more money and a much more favourable lending rate than smaller firms

Technical economies:

• To enable growth, a business is more likely to increase levels of production and productivity by making greater use of capital equipment

• The automation of production lines offers cost savings as more can be produced with less waste and greater efficiency than using human capital

• Drawbacks of this approach include job losses, lower staff motivation and the high initial cost of investment in equipment

Marketing economies:

• Increasing growth brings with it the need for additional marketing and promotion campaigns

• An increased scale of production means that marketing costs are now spread out over more units of output, therefore reducing the average costs of marketing

Managerial economies:

• As a sole trader, a business owner would be expected to carry out all tasks to keep the business afloat

• The business owner would be responsible for marketing, production, sales, finance, HR and logistics

• As the business grows in size, so the levels of hierarchy within the business increase and they employ specialists (experts) in each field e.g. HR manager, sales manager etc

• The specialists make fewer mistakes and this means lower costs which brings about managerial economies of scale

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

  • Examples:

    • Having many specialist suppliers close by

    • Access to research and development facilities

    • The pool of skilled labour to choose from