Economies of Scale

Economies of Scale

The advantages of large scale production that result in lower unit costs (cost per unit) Economies of scale spreads total costs over a greater range of output

The whole point about economies of scale is in the word 'scale'. Scale means big, large,

massive

; and as such gives us a clue to the nature of this topic .

The changing scale of production

Economies of Scale

Internal advantages that arise as a result of the growth of the firm

Technical Commercial Financial Managerial Risk Bearing

Internal = growth of the firm

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

External = growth of the INDUSTRY

Economies of Scale - Internal: Technical

Larger companies can afford bigger machines which may produce more efficiently and do more tasks More machines can mean less staff Machines can work 24/7 The larger the business the greater the number of tasks that a piece of equipment will have to do. Increased dimensions bigger containers can reduce average cost A local B&B industrial toastermay only use a few racks, where a hotel will t end to use all racks at once!

Technical economies of scale going large!

Dualite 6 slicer 190

7.99 4 slicer

950 can toast 1000 slices per hour!

Bulk Buying Economies

The larger the company the more it tends to buy in materials and components. The larger the order the better the discounts and the less frequent deliveries also reduces delivery costs. Supplier just uses a larger box/lorry rather than sending in lots of small packages!

What profits can be made from bulk purchasing?

Motorola Razr V3i D&G Cellular Phone RRP: 504 Wholesale Price: 154 Min bulk purchase 100

Managerial Economies

The larger the company, the more specialised each manager can become. In a small business, there is usually only one manager who has to do everything. In a large business, there is a larger span of control, with specialist managers for each department.

Use of specialists accountants, marketing, lawyers, production, human resources, etc

Financial Economies of Scale

The smaller the business, the greater the risk for a bank to lend you money. The larger the business, the less of a risk due to experience, more products, greater diversification, better specialist accounting managers. Large firms able to negotiate cheaper finance deals

Economies of Scale
Risk

Bearing

Greater Diversification Markets across regions/countries Product ranges how R&D

Tesco in Cracow

Proctor & Gamble

Owns 250 different product ranges

Increased Dimensions economies of scale

Literally the benefits of large scale factories. This is a 10bn Anchor butter factory!

Economies of Scale
Unit Cost Scale A 82p

The larger the output the lower the cost per unit!
Scale B

54p LRAC

MES

Output

Economies of scale Diagram

Diseconomies of scale

Diseconomies of Scale

The disadvantages of large scale production that can lead to increasing average costs

So what could cause costs to increase?

Causes of Diseconomies of scale

Problems of management too many managers to control & lots of salaries to pay! Maintaining effective communication especially internationally different languages Co-ordinating activities often across the globe! De-motivation and alienation of staff a very small person in a very BIG business.. THEM v US issue Divorce of ownership and control do staff/managers care about the company?

So whats the benefits of being small?

Brainstorm

Benefits of being small.

Managers know every member of staff Managers are on the shop floor or deal with customers every day Highly specialised products niche marketing where there might be inelastic demand! Less of a threat to big firms who focus on mass markets.

Plenary pause for thought!

What is the main difference between economies and diseconomies of scale? What are the 5 main economies of scale?

Why might employee motivation decrease as a result of growth? What are the managerial motives for growth?