1. Economies of Scale To be able to define economies of scale. (E) To be able to identify relevant economies of scale for a business. (C) To be able to evaluate the impact of economies of scale on the operations of a business. (A)

2. Economies of Scale When average costs fall as the scale of production increases, economies of scale exist. These can be achieved in any business in any industry. This can lead to a reduction in the variable cost per unit produced of a business. https://www.youtube.com/watch?v=VDZTBxhlSTE

3. Efficiency and economies of scale Productive efficiency is linked to ECONOMIES and DISECONOMIES of scale When firms increase the scale of their production, their average costs change

4. For example: a specialist car manufacturer produces 2,000 cars a year on average costing £50,000 each to make. If production increases to 2,000,000 a year, the average cost of production may fall to £15,000.

5. Activity Can you think of an example in pairs of how a business may reduce its average cost simply by virtue of becoming larger?

6. Economies of Scale Occur when a firm grows and changes its scale and size  Purchasing economies  Marketing economies  Technical economies  Specialisation and Managerial economies  Financial economies  Risk bearing economies

7. Purchasing economies The greater the quantities bought of raw materials and other supplies, the lower the average cost Large buyers are able to negotiate larger discounts as they have more market power Bulk orders may save on packaging and transport costs

8. Marketing economies Marketing costs will be lower per unit sold the greater the volume of sales Eg the cost of an advertisement is the same, however many sales it generates Large companies can afford their own fleets of vans The cost of selling 30 product lines is not double that of selling 15 product lines http://www.youtube.com/watch?v=TnzFRV1LwIo

9. Technical economies Larger scale machinery or plant can often be more efficient than smaller scale plant. A boat which is twice the length, breadth and depth of another boat can carry 8 times as much cargo (the principle of increased dimensions) A larger supermarket costs less per sq ft to build than a small supermarket

10. Technical economies contd. The larger the scale of production, the more likely it is that resources will be fully utilised (indivisibility) Eg a small building firm may only utilise a truck a few hours a week, a large firm would use it more intensively, but the truck costs the same to buy for both firms; the average cost to the larger firm falls The law of multiples; as firms grow, they can employ a balance of machines so that when they operate together, they are all running at full capacity; using more slower machines can compensate for the loss of speed, keeping up with the capacity of the faster machines

11. Specialisation and Managerial economies In a small firm, the owner might be part time salesperson, accountant, receptionist and manager A large firm will employ specialist staff, likely to lead to greater efficiency and therefore lower costs

12. Financial economies Small firms often find it difficult and expensive to raise finance Small firms are charged higher rates of interest as they are a higher risk Large firms have a greater choice of finance, including share issues, and it is likely to be much cheaper as they are seen to be less of a risk

13. Risk bearing economies Large firms are usually less exposed to risk than small firms because they are able to spread risk by diversifying their output, markets, sources of supply and finance, and the processes by which they manufacture their output This makes them less vulnerable to sudden changes in demand Funds may be spent on R&D

14. Task Complete the economies of scale worksheet