Economies of Scale

Risk bearing economies of scale

A large firm can sell in many markets so that if one fails the other keep the firm afloat.

Marketing Economies of scale

A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market.

Diseconomies of scale

As output increases, long run average costs increase Larger firm= poor communication as it's difficult to maintain an effective flow of info between departments or between head office and subsidiaries. Time lags in flow of info = slower response to changing market conditions. Large firms= = harder to co-ordinate operations than in a smaller firm. Low motivation of workers in large firms is a potential diseconomy of scale that results in lower productivity, as measured by output per worker. Large firms = principal-agent problem. The size and complexity of most large firms = owners often have to delegate decision making to appointed managers, which can lead to inefficiencies. Admin bureaucracy- time zones, languages Regulation threshold costs Risk aversion Rising costs of complexities 'X' inefficiency

Economies of scale

Falling long run average costs as output increases = the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production. It reduces the per unit fixed cost. As a result of increased production, the fixed cost gets spread over more output than before. It reduces the per unit variable costs. Economies of scale bring down the per unit variable costs. This occurs as the expanded scale of production increases the efficiency of the production process.

Long run average cost curve and short run average cost curve

In the SR a least one FoP is fixed- usually capital= expansion is constrained. However, in LR all factors become variable and factory/ second store can be opened and new AC can be drawn. The LRAC curve is drawn tangental to SRACs, clearly showing EofS and DisEofS

Economies of scope

LRAC falling due to the introduction of a wider range of products. E.g. Amazon can ship lots of different types of goods together. Or can produce lots of different goods in same factory (rent, lighting, packaging)

Financial Economies of scale

Large firms can get lower interest rates (borrow more cheaply) from banks because they are deemed to be lower risk than smaller firms due to higher collateral e.g. valuable assets which can be used a security especially in comparison with smaller/ newer businesses Larger firms can raise money on the stock market for growth

Technical economies of scale

Large-scale businesses can afford to invest in expensive and specialist capital machinery. Never leave idle machinery in bigger firm One delivery van was being used half full but now production has expanded it is completely full= the unit cost of transporting those items has decreased

Types of economies of scale

Marketing Managerial Technical Financial Bulk buying/ Purchasing Risk bearing

R & D economies of scale

R & D expenditure can be spread over a higher output

Administrative/ Managerial economies of scale

Specialist administrative staff can be hired for larger firms. When two firms merge cutting down of staff- no need for to CEOs

External economies of scale

The cost benefits that all firms in the industry can enjoy when the industry expands. E.g. technological breakthrough in the industry which lowers average unit costs E.g. investment in a better transport network servicing an industry will resulting in a decrease in costs for a company working within that industry E.g. Agglomeration when firms within that industry all locate in the same distinct geographical area as they benefit from being clode to one another or close to a service e.g Silicone Valley in California More better access to experts, share technology, easier/ cheaper to get loans etc.

Minimum efficient scale (MES)

The lowest point where a firm can produce such that its long run average costs are minimised