Economies & Diseconomies of scale (AO2)
Economies of scale: A proportionate saving in costs gained by an increased level of production,
y and reductions in a firm’s unit costs of production that result in an increase in the scale of
operations with cost per unit of output generally decreasing with increasing generally scale as
fixed costs are spread out over more units of output.
The average cost (AC):
It’s calculated by dividing total costs of producing 100 shirts amounts to 800 then the cost of
each shirt is 8 dollars.
- Average costs consist of Average fixed costs which are calculated by dividing the total
fixed costs by the level of output and average variable costs which are calculated by
dividing the total variable cost by the level of output.
- AFC of a firm will decline continuously with larger levels of outputs, because the TFC
constant but are spread over an increasing amount of output.
Internal economies of scale: Economies of scale that occur inside the firm and are within its
control.
- Technical economies: Best tech that will advantage a business
- Financial economies: Borrowing and funding potential
- Managerial economies: Expertise that will drive down costs for a business
- Specialization economies: similar to managerial economies but result from the division of
labor of workforce rather than the management.
- Marketing economies: More effective marketing
- Purchasing economies: Wholesale buying power
- Risk bearing economies: can handle the volatility in one industry or region because they
have other segments making profit
External economies of Scale:
- Are costs saving benefits of large scale operations arising from outside the business due
to its favorable location/general growth in the industry.
Examples:
- Technological progress:
- Improves transportation networks
- Abundance of skilled labor:
- Regional speciality
, Small v.s large organizations
- Reasons why firms might seek to grow:
- To reap benefits of large-scale production (economies of scale)
- To gain larger market share and market power.
- Allows firms to charge higher prices yet gain more profit.
- Growth is a means for survival - competitors also strive for growth.
Economies of scale: A proportionate saving in costs gained by an increased level of production,
y and reductions in a firm’s unit costs of production that result in an increase in the scale of
operations with cost per unit of output generally decreasing with increasing generally scale as
fixed costs are spread out over more units of output.
The average cost (AC):
It’s calculated by dividing total costs of producing 100 shirts amounts to 800 then the cost of
each shirt is 8 dollars.
- Average costs consist of Average fixed costs which are calculated by dividing the total
fixed costs by the level of output and average variable costs which are calculated by
dividing the total variable cost by the level of output.
- AFC of a firm will decline continuously with larger levels of outputs, because the TFC
constant but are spread over an increasing amount of output.
Internal economies of scale: Economies of scale that occur inside the firm and are within its
control.
- Technical economies: Best tech that will advantage a business
- Financial economies: Borrowing and funding potential
- Managerial economies: Expertise that will drive down costs for a business
- Specialization economies: similar to managerial economies but result from the division of
labor of workforce rather than the management.
- Marketing economies: More effective marketing
- Purchasing economies: Wholesale buying power
- Risk bearing economies: can handle the volatility in one industry or region because they
have other segments making profit
External economies of Scale:
- Are costs saving benefits of large scale operations arising from outside the business due
to its favorable location/general growth in the industry.
Examples:
- Technological progress:
- Improves transportation networks
- Abundance of skilled labor:
- Regional speciality
, Small v.s large organizations
- Reasons why firms might seek to grow:
- To reap benefits of large-scale production (economies of scale)
- To gain larger market share and market power.
- Allows firms to charge higher prices yet gain more profit.
- Growth is a means for survival - competitors also strive for growth.
