key words: economy of scale ; cost per unit ; internal ; external economies of scale this section...
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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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
DOUBLE THE OUTPUT – LESS THAN DOUBLE THE COSTS
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Economies of Scale
The advantages of large scale production that result in lower unit (average) costs (cost per unit)
AC = TC / Q
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
SPREAD TOTAL COSTS OUT OVER GREATER OUTPUT
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Benefits of being BIG!
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
1.Internal Economies of Scale
Internal – advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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.
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Economies of Scale
Managerial Use of specialists –
accountants, marketing, lawyers, production, human resources, etc.
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Why do businesses produce MANY products?
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Economies of Scale
Risk Bearing Diversification Markets across
regions/countries Product ranges R&D
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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.
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
2. Internal Diseconomies of Scale
What problems are there if businesses get too BIG?
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
3. External economies of scale
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
4. External Diseconomies of scale
Why are wages in Silicone Valley so high?
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
4. External Diseconomies of scale
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.
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
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
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
DOUBLE THE OUTPUT – _____ THAN _________ THE COSTS
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
SPREAD TOTAL _______ OUT OVER ________ OUTPUT
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Explain the pics
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Question
Explain why banks locate together in areas like the City of London?
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
KEY WORDS: Economy of Scale ; cost per unit ; internal ; external
Notes for Revision
1. Internal Economies of Scale
• Define • Explain • Example
2. Internal diseconomies of scale
•Define •Explain •Example
3. External economies of scale
•Define •Explain •Example
4. External Diseconomies of scale
•Define •Explain •Example
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