Business Studies

Economies of scale

There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as disecomonies of scale.

The benefits of large-scale business

Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:

• Purchasing economies when large businesses often receive a discount because they are buying in bulk.
• Marketing economies from spreading the fixed cost of promotion over a larger level of output.
• Administrative economies from spreading the fixed cost of management staff and IT systems over a larger level of output.
• Research and development economies from spreading the fixed costs of developing new or improved products over a larger level of output.

Types of costs

Big companies, like the ones based in Canary Wharf in London, can enjoy economies of scale

Fixed costs are expenses that do not change with the level of output. Large firms have…