CHAPTER 5 BM

Economies of scale — lower average cost of production as a firm operates on a larger scale due to an improvement in its productive efficiency

Average cost = total cost divided by the quantity of output

Average cost — cost per unit of output

Average cost consist of 1. average fixed costs 2. average variable cost

AFC = TFC divided by Q

AVC = TVC divided by Q

Optimal level of output — where average cost is minimised, therefore, any further increase in output brings diseconomies

Economies of scale that occurs inside the firm and is within its control — internal economies of scale

Economies of scale that occurs beyond an individual firm’s control and occurs within the industry — external economies of scale

Internal economies of scale:

  1. technical economies

  2. Financial economies

  3. managerial economies

  4. specialisation economies

  5. marketing economies

  6. purchasing economies

  7. risk-bearing economies

technical economies — large firms can use sophisticated capital and machinery to mass produce their products. Small businesses do not find it cost efficient to buy and use such technologies. Example: Philips in Shenzhen, China.

Financial economies — large firms are able to borrow large sum of money at lower rates of interest compared to smaller competitors because larger organisation are less risky to financial leaders. choose a lender that offers the most attractive interest rate

Managerial economies — small business doesn’t have the money to hire different managers and specialists for each section of the business. However, as the firm grow larger, firms are able to hire specialist managers which increases their productivity thereby decreasing their average cost Eg. Samsung

Specialisation economies — In a small business, one worker may have to do every part of the production process. However, in a larger firm, the work is divided into small, specific task for each worker. Because the firm is large, it can afford to hire and train specialist workers for each specific task, therefore increasing productivity and decreasing average cost.

eg. Motor vehicle manufacturers use mass production techniques that rely heavily on specialisation. Instead of one person trying to build a whole car, they have different teams of specialists—like designers and engineers—who are each responsible for a single part of the process

Marketing economies — large businesses make their selling and advertising process more efficient. this can be selling in bulk, time and transaction cost savings by selling their products in huge quantities to a single customer rather than a small amount for many customers. Big global brands like McDonald's and Nike can afford to run massive, expensive advertising campaigns because they spread the cost across the millions of products they sell worldwide. For these firms, the cost of translating a global campaign into different languages is a very minor part of their total budget, allowing them to reach a global audience at a very low cost per customer

SWOT analysis — a strategic planning framework used to evaluate an organization’s, project's, or person's competitive position by identifying internal Strengths and Weaknesses, alongside external Opportunities and Threats