Economies of Scale. Lesson Objective By the end of this lesson all students should be able to develop their knowledge and understanding of Economies of.

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Presentation transcript:

Economies of Scale

Lesson Objective By the end of this lesson all students should be able to develop their knowledge and understanding of Economies of Scale, diseconomies of scale and the growth of firms through Integration.

What is Economies of scale? Economies of scale occur when the average costs of running a business fall as a firm increases its output and size.

Example If I buy ingredients to bake 1 cake it will cost £4. If I bake a second or third cake I will be able to use ingredients already bought so the average cost of the cake decreases.

Average Cost Average Cost = Total Cost Number Produced

Experts in the business world including Deborah Meaden, Lord Sugar and Hugh Pym explain what Economies of Scale are and why they are essential to a successful business.  /economies-of-scale/10967.html /economies-of-scale/10967.html

Internal Economies of scale

Occurs when a business invests in new technology and is able to increase production. As a result, production costs per unit will fall. Occurs when a business buys goods in bulk and benefits from discount. Occurs when a business grows and the average cost of advertising per unit falls Occurs when a large business can borrow money at a lower rate of interest than a smaller business Occurs when a large firm can employ specialist workers to complete tasks and can spread the cost Occurs when a business produces a range of products, which means it is not dependant on just one product.

Occurs when a business invests in new technology and is able to increase production. As a result, production costs per unit will fall. Occurs when a large firm can employ specialist workers to complete tasks and can spread the cost Occurs when a large business can borrow money at a lower rate of interest than a smaller business Occurs when a business produces a range of products, which means it is not dependant on just one product. Occurs when a business buys goods in bulk and benefits from discount. Occurs when a business grows and the average cost of advertising per unit falls

InternalEconomiesInternalEconomies ExternalEconomiesExternalEconomies Location Skilled Labour Transport Reputation of Area Technical Purchasing Financial Managerial Risk bearing Marketing

Diseconomies of Scale The opposite of an economy of scale is a diseconomy of scale. Diseconomies of scale occurs when Average Costs start to rise with increased output.

How do firms grow? 3 main ways  Merging – two or more firms join together to become one.  Take over – when a firm buys control of another  Internal expansion – increasing production from inside business

Flour Miller A Backwards Vertical Integration Wheat Farmer Diversification Purchases a Perfume manufacturer Forwards Vertical Integration Bakery Horizontal Integration Flour Miller B OCR Textbook page 125

Extra Activity business-studies/production/interactive- quizzes/1175-economies-of-scale-gap-fills