Economies of scale

  • Created by: Ali Bland
  • Created on: 07-03-15 11:36
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  • Economies of Scale
    • In LR all costs are variable and scale of production can change E of S is cost advantage of expanding scale of prooduction in LR
      • E of S can act as barrier to entry
    • Represent improvement in productive efficiency and can give business competitive advantage i market
    • Increase in production can increase returns to scale
      • Constant returns to scale is MES
    • Technical economies of scale
      • Expensive capital inputs (large firms can afford specialist capital machinery)
      • Specialisation of workforce (boosts productivity) eg. division of labour in motor mass production
      • Law of increased dimensions (doubling height and width of building/ tarnker -> more than proportionate increase in capacity
        • Important for energy sectors and industries such as office rental and warehousing
        • Eg. Amazon invested in several huge warehouses at central distribution points
      • Unit manufacture costs typically fall by 70% - 90% with each doubling of cumulative output
    • Marketing economies of scale
      • Large firm can purchase its factor inputs in bulk if it has monopsony (buying) power
      • Ability of electricity generators to negotiate lower prices when finalising coal and gas supply contracts
      • Tesco has monopsony power when buying supplies from farmers
        • Aggressive policy- ask for money to hit targets or de-list items
      • Amazon has high monopsony power when purchasing books from publishers
    • Managerial economies of scale
      • Form of division of labour- firms can employ specialists to supervise production
      • Better management; increased investment in human resources
      • Use of specialist equipment eg. networked PCs can improve communication, raise productivity and reduce costs
    • Financial economies of scale
      • Larger firms are rated to be more credit worthy and have more favourable rates of borrowing as lower risk
      • Smaller firms pay higher interest on overdrafts and loads
      • Credit crunch and fragility of banking system made raising finance harder for all businesses, especially small
      • Average personal loan rate was 15% in 2010
    • Network economies of scale
      • Power of networks is becoming increasingly recognised
      • As networks are more widely used, they become more valuable to the businesses that provide them
      • Eg. Ebay, social network sites and Amazon
        • MC of adding one more customer is near 0 but financial benefits large
          • High fixed costs but as network expands, LR cost/user diminishes- internal economies of scale
      • Some classified as natural monopoly eg. Network Rail -case for nationalisation
    • External economies of scale
      • Outside firm, within industry
      • Eg. Investment in industry-related infrastructure including telecommunications can cut costs for all
      • Science cities are knowledge clusters that bring together higher education expertise and entrepreneur-ial zeal.
        • Tech city, around Shoreditch home to a growing number of technology companies- 3,200 firms
    • Economies of scope
      • When it's cheaper to produce a range of products rather than specialise in small number
      • Royal Mail making better use of its collection, sorting and distribution network to reduce costs and earn higher profit
      • Expanding product range to exploit value of existing brands
        • Eg. the Easy Group applied business model to easy Pizza, easy Cinema, easy Hotel etc.
      • Amazon is looking at increasing range of products- marketplace, enterprise solutions, kindle


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