Microeconomics: Economies of Scale

Financial Economies of Scale

- Banks are more willing to lend to larger firms as they are more reputable and trustworthy. - The firms may be able to negotiate better interest rates and payback options - The was in which larger firms are able to raise finance reflects on their dominance within the market - LRAC falls as the firm is able to capitalise on its size

Risk Bearing Economies Of Scale

- Large firms are able to take risks and diversify because - they have the financial ability to do so - they have the expertise - they have factor inputs - if the business venture does fail then they have other markets to fall back onto, unlike a smaller firm. E.g. Tesco and Virgin

Managerial Economies of Scale

- Large firms can recruit skilled professional staff as they are more well known and reputable. - Large firms have the finance to attract the most skilled staff. - Training costs are reduced as you can train more workers at once. - the skilled level of managers/ employees that the firm had will enhance the efficiency of the business thus reducing LRAC

Technical Economies of Scale

- Large scale firms can afford to invest in expensive capital inputs and specialist capital machinery. E.g. Tesco can invest in technology that improves stock control - it might not however, be viable or cost efficient for a small corner shop to buy this technology. - This would lead to a fall in the firms LRAC - Divisions of labour improves productivity

What are the internal economies of scale?

- Purchasing economies of scale - Marketing Economies of Scale - Managerial Economies of Scale - Financial Economies of Scale - Technical Economies of Scale - Risk Bearing Economies of Scale

Diseconomies of scale

A rise in LRAC of production as output rises

External economies of scale

Falling average costs of production shown by a downwards shift in the average cost curve which result from a growth in the size of the industry within which a firm operates

Purchasing and Marketing Economies of Scale

Purchasing larger amounts of stock will result in greater bulk and discounts this leading to a fall in long run average costs. - Larger firms can also dictate better trade credit - Lower distribution costs - Cost effective media advertising

Economies of Scale

Refers to the decrease in long run average costs as the scale of production increases

Minimum efficient scale

The lowest level of output at which long run average cost is minimised