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 OutputTotal 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 2 As 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% The cost per unit will ………… Up Same Down Yes 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 Scale Increased Dimensions: e.g. 5m 2m Transport container = Volume of 20m 3 Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = £600 per journey AC = £30m 3 4m 10m 4m Transport Container 2 = Volume 160m 3 Total Cost = £1800 per journey AC = £11.25m 3

KEY WORDS: Economy of Scale ; cost per unit ; internal ; external Videos    

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 3 Double 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

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