Business - Economies of Scale

The definition of Economies of Scale:

Unit Costs = cots spent on each unit being produced

Economies of scale occur when unit cots (or average cost per unit) fall as a firm increases the scale of production i.e output

It is important for a firm to have low unit costs because:

• Low BEP- more profit
• Competitive prices (reduce prices to sell more) 
• Maintain same selling price and earn more
• reduce price to sell more whilst still keeping same profit margin

There are a variet of economies of scale.You need to know:

• Bulk Buying 
• Technical (spending more on effective machienery)
• Specialisation (employ specially trained staff to split up working)

BULK BUYING

When a firm obtains a discount for buying in bulk. As the firm is buying a larger quantity they are able to secure lower prices per unit

TECHNICAL

Technical economies of scale occure when a firm is able to spend more on larger and more effiecent machinery, allowing it to price more items of a consistent quality. 

As a reults the firm is able to spread its fixed costs over a greater output and is therefore likely to obtain lower costs per unit. 

SPECIALISATION

As a firm expands it can employ speialist personnel for different jobs. A division of labour allows staff to focus on particular areas. This may lead to staff that are

• better qualified
• more experienced and
• more efficient