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
- MC of adding one more customer is near 0 but financial benefits large
- 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
- 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
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