key words: economy of scale ; cost per unit ; internal ; external economies of scale this section...

KEY WORDS: Economy of Scale ; cost per unit ; internal ; external

Economies of Scale

This section is split into 4 sections ;

1. Internal economy of scale 2. Internal diseconomy of scale 3. External economy of scale 4. External diseconomy of scale


DOUBLE THE OUTPUT – LESS THAN DOUBLE THE COSTS


Economies of Scale

The advantages of large scale production that result in lower unit (average) costs (cost per unit)

AC = TC / Q


SPREAD TOTAL COSTS OUT OVER GREATER OUTPUT


Output Total Costs

40%

30%

= Unit Cost ?

Unit cost = total cost output

Economies of Scale 1

When output increases by a greater % than total costs there is an economy of scale


Economies of Scale 2As firms increase in size, total costs increase less than proportionately.

Increase in Output

Increase in Costs

Unit Cost

EOS?

50% 75%

50% 25%

75% 76%

43% 43%

The cost per unit will …………

Up

Up

Same

Down Yes

No

No

No


Benefits of being BIG!


1.Internal Economies of Scale

Internal – advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing


Economies of Scale

Internal: Technical Specialisation – large organisations

can employ specialised labour Indivisibility of plant – machines can’t

be broken down to do smaller jobs! Principle of multiples – firms using more

than one machine of different capacities - more efficient

Increased dimensions – bigger containers can reduce average cost


Economies of Scale

Indivisibility of Plant: Not viable to produce products

like oil, chemicals on small scale – need large amounts of capital

Agriculture – machinery appropriate for large scale work – combines, etc.


Economies of Scale

Principle of Multiples: Some production

processes need more than one machine

Different capacities May need more than one

machine to be fully efficient


Economies of ScaleIncreased Dimensions: e.g.

5m

2m

2m

Transport container = Volume of 20m3

Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = £600 per journeyAC = £30m3

4m

10m

4m

Transport Container 2 = Volume 160m3

Total Cost = £1800 per journeyAC = £11.25m3


Videos

https://www.youtube.com/watch?v=HmzBdXiRgho

https://www.youtube.com/watch?v=HIWKUwol9WU

https://www.youtube.com/watch?v=sbI7KD9FU3Q

https://www.youtube.com/watch?v=6ihehRMtRWc


Economies of Scale

Commercial Large firms can negotiate favourable

prices as a result of buying in bulk

Large firms may have advantages in keeping prices higher because of their market power


Economies of Scale

Financial Large firms able to negotiate

cheaper finance deals Large firms able to be more

flexible about finance – share options, rights issues, etc.

Large firms able to utilise skills of merchant banks to arrange finance


Economies of Scale

Managerial Use of specialists –

accountants, marketing, lawyers, production, human resources, etc.


Why do businesses produce MANY products?


Economies of Scale

Risk Bearing Diversification Markets across

regions/countries Product ranges R&D


Economies of Scale 3Double output, …….. ……. double cost.

Cost per unit

(£)

Output

Economy of Scale

Diseconomy of Scale

Unit/Average Cost

As the firm grows, unit costs fall and then rise

Diseconomies of scale – double output ………. …….. double cost.


2. Internal Diseconomies of Scale

What problems are there if businesses get too BIG?


Internal Diseconomies of Scale

The disadvantages of large scale production that can lead to increasing average costs Problems of management Maintaining effective communication Co-ordinating activities – often across

the globe! De-motivation and alienation of staff Divorce of ownership and control


3. External economies of scale


External Economies of Scale

External economies of scale – the advantages firms can gain as a result of the growth of the industry – normally associated with a particular area

Supply of skilled labour Reputation Local knowledge and skills Infrastructure Training facilities


4. External Diseconomies of scale

Why are wages in Silicone Valley so high?



Why are wages in Silicone Valley so high?

Small specialized pool of firms chasing the same pool of labour.

Workers demand high wages to move to competitors.


Recap

External Economies of Scale

Internal – advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing

Diseconomies of Scale


DOUBLE THE OUTPUT – _____ THAN _________ THE COSTS


SPREAD TOTAL _______ OUT OVER ________ OUTPUT


Explain the pics


Question

Explain why banks locate together in areas like the City of London?


Notes for Revision

1. Internal Economies of Scale

• Define • Explain • Example

2. Internal diseconomies of scale

•Define •Explain •Example

3. External economies of scale




key words: economy of scale ; cost per unit ; internal ; external economies of scale this section...

Documents

economy of scale cost

internal economy of

external economy of

internal diseconomy

small scale

key words

unit internal external

average cost slide