Economies of Scale

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  • Economies of Scale
    • What are Economies of Scale, and When do they occur?
      • These occur when mass producing a good results in lower average cost. Average costs fall per unit – Average costs per unit = total costs / quantity produced Economies of scale occur within an firm (internal) or within an industry (external).
    • Internal Economies of Scale
      • Purchasing/Marketing Economies
        • Advertising costs can be spread across products
        • Large businesses can employ specialist staff
        • Bulk Buying- buying more means a decreased unit cost
      • Financial Economies
        • Larger firms have better lending terms and lower interest rates and its easier for them to raise capital
        • Risk is spread over more products and administration costs can be divided amongst more products
        • Greater potential finance from retained profits
      • Production/Technical Economies
        • Larger Firms can use computers etc to replace production line
        • Mass Production Lowers unit cost
        • Able to take advantage of bulk materials
      • Managerial Economies
        • More specialised management can be employed, this increases the efficiency of the business decreasing the costs
      • As a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more cheaply.
      • Risk-Bearing Economies
        • Large firms are more likely to take risks with new products as they have more priducts to spread the risk over
    • External Economies of Scale
      • These are shared by a number of businesses in the same industry in a particular area. These are advantages gained for the whole industry, not just for individual businesses.
      • Examples
        • As businesses grow within an area, specialist skills begin to develop.
        • Skilled labour in the area – local colleges may begin to run specialist courses.
        • Being close to other similar businesses who can work together with each other.
        • Having specialist supplies and support services nearby


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