Business - Economies of Scale

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  • Created by: Emily
  • Created on: 24-12-12 15:38

Definition

The definition of Economies of Scale:

Unit Costs = cots spent on each unit being produced

Economies of scale occur when unit cots (or average cost per unit) fall as a firm increases the scale of production i.e output

It is important for a firm to have low unit costs because:

  • Low BEP- more profit
  • Competitive prices (reduce prices to sell more) 
  • Maintain same selling price and earn more
  • reduce price to sell more whilst still keeping same profit margin
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Types of Economies of scale

There are a variet of economies of scale.You need to know:

  • Bulk Buying 
  • Technical (spending more on effective machienery)
  • Specialisation (employ specially trained staff to split up working)

BULK BUYING

When a firm obtains a discount for buying in bulk. As the firm is buying a larger quantity they are able to secure lower prices per unit

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Types of Economies of scale

TECHNICAL

Technical economies of scale occure when a firm is able to spend more on larger and more effiecent machinery, allowing it to price more items of a consistent quality. 

As a reults the firm is able to spread its fixed costs over a greater output and is therefore likely to obtain lower costs per unit. 

SPECIALISATION

As a firm expands it can employ speialist personnel for different jobs. A division of labour allows staff to focus on particular areas. This may lead to staff that are

  • better qualified
  • more experienced and
  • more efficient
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