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Economies of Scale

Large firms can benefit from economies of scale in several ways: 1) They can purchase raw materials in bulk at more favorable prices due to bulkbuying. 2) They can invest in better machinery and benefit from division of labor leading to greater efficiency and output. 3) They can hire specialists in different fields like managers and accountants to improve productivity.

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21 views2 pages

Economies of Scale

Large firms can benefit from economies of scale in several ways: 1) They can purchase raw materials in bulk at more favorable prices due to bulkbuying. 2) They can invest in better machinery and benefit from division of labor leading to greater efficiency and output. 3) They can hire specialists in different fields like managers and accountants to improve productivity.

Uploaded by

jessmgaffney
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Costs, revenues and profits

Economies of scale

Bulkbuying large firms can buy raw materials e g toilet rolls


in bulk at more favourable places

Technical largefirms can take advantage of Contruction e.g


investing inbettermachinery and can concretemixer
benefit from the division of labour Aefficiency and output
Highly specialist

managerial largerfirms can hire specialists indifferent eg greaterdivisionof


fields e.gmanagers accountants andis labourimprovesefficiency
ableto 9productivity

marketing large firms can afford to advertise small brands cantafford


and sell in largerquanities to develop Tvadverts
brandloyalty

finanical largefirms can negotiatebetterinterestrates RichardBransongets a


on loansThisreducesthecost ofborrowing lowerinterestratethen a
forlargercompanies cornershop

Riskbearing large firms are able to diversify into a virginhaveplanes trains


range of productareas1markets and I Tu phone broadband
the risk

Dimensions if a cubic area x 2 thenvolume9 by84 Acapacitywithlowertheunit


costbutHavecost cost eg askyscrapperdouble
deckerbus

Economies of scale - long run average cost fall (LRAC) fall as output increases

Diseconomies of scale - long run average cost start to increase arise due to shortage of
skilled labour e.g. increased house costs
Externaleconomies of scale External diseconomies of scale
Technology technology developmentHac Taxation gov imposed a tax t profits and
and I LRAC forfirmsoperating in the ALRAC
industry congestion supportingtheintrastructionofthe
Poolofskilllabour supply oflabourTLRAct industry eg transportnetwork i Lrac A
industrial infrastructure improvement of Labour shortages when shortages of skills
networks of specialised services joint trainninge.g dueto lackofhousing LRAC4
and educationfacilites andtransport t LRAC

Advantages of economies of scale


• increased use of machinery
• Decreased prices for consumers
• Decreased AC could increase pro t margin
• If decreased price for consumers = barriers to entry as other rms can’t compete and
only large rms are competitive enough
• Increased market share if decreased price

LRAC
unit
cost

mac
output

• LRAC is the lowest point on the minimum ef cient scale (MES)


• Eventually LRAC will increase due to diseconomies of scale

How firms expand and grow


Internal growth - reinvesting its retained pro ts into the existing business

External growth - integration with other rms via mergers and acquisitions

By increasing productive capacity a rm can reduce its long run average cost and
become more competitive, this is known as economies of scale

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