gcse economics - firms - economies of scale
The benefits gained from producing on a large scale. It usually means that the average cost of making a good is lowered.
Example
If a car manufacturer in Derby produced more cars it should see a fall in its average costs per car. If it only produces 1 car it still has to pay its rent, managers, bills etc.
Number of Cars |
Total Cost (£) |
Average Cost |
1 |
1,000 |
£1,000 |
100 |
30,000 |
£300 |
1,000 |
100,000 |
£100 |
As a number of the costs are fixed it is beneficial to produce on a larger
scale.
This means the firm can either a) reduce its price or b) keep the same price and make more profit
TYPES OF ECONOMIES OF SCALE
Think of the advantages that ToysrUs has over a small, independently-owned toy shop in near you
• MANAGERIAL Employ specialist managers e.g. accountants.
• FINANCIAL Easier to get a loan from the bank
• DIVERSIFY Sell a range of products. Reduces the risk of failure.
• ADVERTISING They can afford to advertise nationally on TV
• BULK BUYING This is cheaper per good for the business
• MASS PRODUCTION Helps spread fixed costs (page)
DISECONOMIES OF SCALE
These are the problems faced by businesses if they become too large
• Lose touch with the customers
•
Managers lose touch with the workers
•
Communication problems because the business is so large
ACTION
a. What economies of scale are enjoyed by Sainsbury’s. Why do they have an advantage over your local corner shop?
b. Despite economies of scale,
why do small businesses like the local newsagent or grocer still survive?
SMART
THINKING
c. What is meant by external economies of scale?
These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email
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