Economies of Scale
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size. There are five economies of scale
Purchasing Economies When businesses buy large numbers of components, for example materials or spare parts, they are able to gain discounts for buying in bulk. This reduces the unit cost of each item bought and gives the firm an advantage over smaller businesses which buy in small quantities.
Marketing Economies There are several advantages for a large business when marketing its own products. It might be able to afford to purchase its own vehicles to distribute goods rather than depend on other firms. Advertising rates in papers and on television do not go up in the same proportion as the size of and advertisement ordered by the business. The business will not need twice as many staff to sell ten product lines as a smaller firm needs to sell five.
Financial Economies Larger Businesses are often able to raise capital more cheaply than smaller ones. Bank managers often consider that lending to large organizations is less risky than lending to small ones. A lower rate of interest is therefore charged.
Managerial Economies Small businesses cannot usually afford to pay for specialist managers, for example marketing managers and qualified accountants. This tends to reduce their efficiency. Larger companies can afford specialists and this increases their efficiency and helps to reduce their average costs.
Technical Economies Large manufacturing firms often use flow production methods. These apply the principle of the division of labor. Specialist machines are used to produce items in a continuous flow with workers responsible for just products in small quantities and flow production could not be justified. The use of flow production and the latest
Purchasing Economies When businesses buy large numbers of components, for example materials or spare parts, they are able to gain discounts for buying in bulk. This reduces the unit cost of each item bought and gives the firm an advantage over smaller businesses which buy in small quantities.
Marketing Economies There are several advantages for a large business when marketing its own products. It might be able to afford to purchase its own vehicles to distribute goods rather than depend on other firms. Advertising rates in papers and on television do not go up in the same proportion as the size of and advertisement ordered by the business. The business will not need twice as many staff to sell ten product lines as a smaller firm needs to sell five.
Financial Economies Larger Businesses are often able to raise capital more cheaply than smaller ones. Bank managers often consider that lending to large organizations is less risky than lending to small ones. A lower rate of interest is therefore charged.
Managerial Economies Small businesses cannot usually afford to pay for specialist managers, for example marketing managers and qualified accountants. This tends to reduce their efficiency. Larger companies can afford specialists and this increases their efficiency and helps to reduce their average costs.
Technical Economies Large manufacturing firms often use flow production methods. These apply the principle of the division of labor. Specialist machines are used to produce items in a continuous flow with workers responsible for just products in small quantities and flow production could not be justified. The use of flow production and the latest