economies of scale.pptx

8/10/2019 economies of scale.pptx

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Economies of Scale


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Economies of Scale

The advantages of large scale

production that result in lower unit

(average) costs (cost per unit)

AC = TC / Q

Economies of scale spreads total costs

over a greater range of output


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Economies of Scale

Capital Land Labour Output TC AC

Scale A ! " #$$

Scale % #$ & ' !$$

Assume each unit of capital = $5, Land = $8and Labour = $2

Calculate TC and then AC for the two differentscales si!es" of production facilit# hat happens and wh#%


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Economies of ScaleCapital Land Labour Output TC ACScale A ! " #$$ $

Scale % #$ & ' !$$ #&" $"

&oublin' the scale of production a rise of ())*" has ledto an increase in output of 2))* + therefore cost of

production -. /01Thas fallen &ont 'et confused between Total Cost and Aera'e Cost 3erall costs will rise but unit costscan fall Why?


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Economies of Scale

Increased Dimensions:e.g.

5m

2m

2m

Transport container = 4olume of 2)m

Total Cost:Construction, drier, fuel,maintenance, insurance, road ta6 =$7)) per ourne#

AC = $30m3

9m

()m

9m

Transport Container 2 = 4olume (7)m

Total Cost= $(8)) perourne#AC = $11.!m3


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Economies of Scale

Marketing

*arge firms can negotiate favoura+le

prices as a result

of +u,ing in +ul-

*arge firms ma, have advantages in

-eeping prices higher +ecause

of their mar-et power

*ower advertising cost per unit


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Economies of Scale

Financial

*arge firms a+le to negotiate cheaper

finance deals. *ower interest rates

*arge firms a+le to utilise s-ills of

merchant +an-s to arrange finance


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Economies of Scale

Managerialse of specialists accountants0

mar-eting0 law,ers0 production0human resources0 etc


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Economies of Scale

Technical economies1iversification and increased

specialisation2ndivisi+ilit, of machiner, (+ig firm can

ta-e advantage of large machiner,

Eg Co-e3s +ottling machine 4s 5r6ohnson3s home +rew

781


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1iseconomies of Scale

The disadvantages of large scaleproduction that can lead to increasingaverage costs9ro+lems of management5aintaining effective communicationCo.ordinating activities often across

the glo+e:1e.motivation and alienation of staff1ivorce of ownership and control


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Ta+le for ;arve,3s %i-es

Year ofproduction

Output-Bikes produced

in 1 year

TC-How much all

costs will be toHarvey Bikes

AC-Cost per unit

of output

!!" 1!! 1!!#!!!

!!$ 1!!! "!!#!!!

!1! 1!!!! %#!!!#!!!

!11 1!!!!! &!#!!!#!!!


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Year ofproduction

Output-Bikes produced

in 1 year

TC-How much all

costs will be toHarvey Bikes

AC-Cost per unit of

output

!!" 1!! 1!!#!!! 1!!!

!!$ 1!!! "!!#!!! "!!

!1! 1!!!! %#!!!#!!! %!!

!11 1!!!!! &!#!!!#!!! &!!

Create a graph to show the a+ove information


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AC


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rom ,our graph>

# ?hat has happened +etween @$$' and

@$#$

@ Bive three possi+le causes for the

trend ,ou gave in uestion #

! ?hat has happened in @$## Bive

possi+le reasons for this change

economies of scale.pptx

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