Economies of Scale

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  • Economies of scale
    • factors that lead to a reduction in unit costs as a business increases in size
    • TECHNICAL: investment in machinery/ equipment
      • Production is quicker and more reliable than manual
      • lower labour costs, no production delays
      • Use of specialist equipment
      • increased efficiency/ reduced costs
    • SPECIALISATION = Large businesses
      • Split into different departments
      • workforce divided- each worker is specialised
      • No time wasted changing from tool to tool
      • Little training required
      • LEADS TO: increased efficiency- reduction in average costs
    • MARKETING: Packaging and market research
      • Costs shared across incresed production levels
      • DISTRIBUTION: Own fleet of vehicles - transport at a cost price advertising
      • ADVERTISING: Cost spread over great output
      • PERSONAL SELLING: Admin costs do not rise in proportion to size of sale
      • Larger assets to offer as security
      • Usually more diversified
      • Less vulnerable to competition (less risky)
      • Large businesses more widely known so:
        • Easier to raise money through shares
        • people more willing to invest in a company theyve heard of
      • Produce a range of different products
      • Operate in several different markets
      • Reduce dependence on any one product, market or activity


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