Economies of scale
There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as disecomonies of scale.
The benefits of large-scale business
Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:
- Purchasing economies when large businesses often receive a discount because they are buying in bulk.
- Marketing economies from spreading the fixed cost of promotion over a larger level of output.
- Administrative economies from spreading the fixed cost of management staff and IT systems over a larger level of output.
- Research and development economies from spreading the fixed costs of developing new or improved products over a larger level of output.
Types of costs
Fixed costs are expenses that do not change with the level of output. Large firms have…