Economies of Scale As a firm increases its output, investment is required to support the growth leading to higher costs. Once the investment has been made it leads higher output where the average cost of production per item falls.

An example of this: Lansdale Wollens operated a small factory making jumpers. Lansdale Wollens operated a small factory making jumpers. Factory was suitable to make 30 jumpers per week. Factory was suitable to make 30 jumpers per week. Has built an extension so they can now make 50 jumpers per week. Has built an extension so they can now make 50 jumpers per week. Their total costs have gone up BUT so has their capacity which means they can make more jumpers per week. Their total costs have gone up BUT so has their capacity which means they can make more jumpers per week.

What this means for the costs Original factory – Original factory – £900 (total cost) £900 (total cost) 30 (number of jumpers made) 30 (number of jumpers made) = £30 per jumper New factory – £1000 (total cost) £1000 (total cost) 50 (number of jumpers made) 50 (number of jumpers made) = £20 per jumper

What does this mean? The average cost of production has fallen as the capacity has increased. The average cost of production has fallen as the capacity has increased. This is economies of scale.

Different types There are 6 different types of economies of scale. There are 6 different types of economies of scale. All of which will lead to reduced average costs. All of which will lead to reduced average costs.

Technical economies A business saves on production costs by using better methods and equipment A business saves on production costs by using better methods and equipment

Managerial economies A business can employ specialist managers who improve efficiency A business can employ specialist managers who improve efficiency

Financial economies A business does not have to pay out as much money to raise finance A business does not have to pay out as much money to raise finance

Risk-bearing economies A business has a range of products or services, so is not dependant on one product A business has a range of products or services, so is not dependant on one product

Purchasing economies A business is given a discount for purchasing in large quantities A business is given a discount for purchasing in large quantities

Marketing economies A business saves on advertising and transport costs A business saves on advertising and transport costs

Look at the following examples and add them to the relevant economy Evergreen Treescapes decides to branch out and offer a lawn fertilising and weed-killing service in order to obtain new customers. Evergreen Treescapes decides to branch out and offer a lawn fertilising and weed-killing service in order to obtain new customers. Busy Buses Ltd decides to replace its single- decker buses with double deckers. Busy Buses Ltd decides to replace its single- decker buses with double deckers. Jensen Fabrics Ltd is able to negotiate a lower rate of interest on bank loans than its smaller competitors. Jensen Fabrics Ltd is able to negotiate a lower rate of interest on bank loans than its smaller competitors. Marks and Spencer plc can afford to employ specialist buyers to negotiate deals with clothing suppliers. Marks and Spencer plc can afford to employ specialist buyers to negotiate deals with clothing suppliers.

Look at the following examples and add them to the relevant economy Holden’s supermarket chain decides to open a chain of petrol stations. Holden’s supermarket chain decides to open a chain of petrol stations. Bowton Brewery Ltd starts to sell food through its public houses. Bowton Brewery Ltd starts to sell food through its public houses. Austin Engineering Ltd switches production of its hydraulic equipment yo a larger factory using computer controlled machinery. Austin Engineering Ltd switches production of its hydraulic equipment yo a larger factory using computer controlled machinery. The growth of Home Soon Coaches leads to the employment of more office staff. This allows people to specialise in one area of work. The growth of Home Soon Coaches leads to the employment of more office staff. This allows people to specialise in one area of work.

Look at the following examples and add them to the relevant economy Johnstone’s Logistics has reorganised it’s structure. It now employs a specialist manager for each department rather than having managers responsible for several departments. Johnstone’s Logistics has reorganised it’s structure. It now employs a specialist manager for each department rather than having managers responsible for several departments. When Munro Toys plc bought Talbot Toys Ltd its production doubled. The amount it spent on advertising rose by 50 percent. When Munro Toys plc bought Talbot Toys Ltd its production doubled. The amount it spent on advertising rose by 50 percent. The Spice Garden Restaurant extends the size of its restaurant from 50 to 80 seats but only takes on one extra waiter. The Spice Garden Restaurant extends the size of its restaurant from 50 to 80 seats but only takes on one extra waiter.

Growth is not always a good thing A firm can experience diseconomies of scale. A firm can experience diseconomies of scale. The firm becomes too big to be managed efficiently. The firm becomes too big to be managed efficiently. Average costs do not fall as a result of the larger size. Average costs do not fall as a result of the larger size.

Diseconomies of Scale This happens when the business gets too big to benefit from a cut in costs and prices start to rise. Happens because: This happens when the business gets too big to benefit from a cut in costs and prices start to rise. Happens because: Bureaucracy – Too much form filling and admin, slow decision making Bureaucracy – Too much form filling and admin, slow decision making Labour relations – Lack of understanding between workers if too big, hard to communicate Labour relations – Lack of understanding between workers if too big, hard to communicate Control and co-ordination – More supervision needed to control really large businesses increasing costs Control and co-ordination – More supervision needed to control really large businesses increasing costs

Exam question – 12 marks Jenston Superstores plc operates a large chain of superstores. In recent years large retailers like Jenston Superstores plc have increased their share of the market. What are the reasons for their success? ECONOMIES OF SCALE Talk about each economy, say what it is, how it has helped them and how it has helped to increase market share and make them a success