9.1e Economies of Scale Flashcards
When do economies of scale arise?
When unit costs fall as output increases
Average cost per unit formula
Average cost per unit = Total cost / output
When does minimum efficient scale occur?
At the output level where average unit costs of production are at their minimum
What do internal economies of scale arise from?
The increased output of the business itself
What are external economies of scale?
Ones that occur within an industry itself
Who benefits from external economies of scale?
All competitors within an industry
What is ‘clustering’ in external economies of scale?
When businesses in similar industries cluster together and attract skilled talent
Example of clustering:
Media in London
Types of economies:
- Purchasing
- Technical
- Managerial
- Distribution
- Marketing
- Network
- Financial
When do purchasing economies occur?
When businesses buy in greater quantities resulting in a lower price
How do purchasing economies work?
The business needs to order larger quantities as it grows - as the order value increases a business obtains more bargaining power with suppliers
Volkswagen example of purchasing economies:
They demand discounts from their component suppliers to reduce its average unit cost per car
What are technical economies?
The use of specialist equipment to boost productivity
How do managerial economies work?
Large businesses can employ managers with specialist skills to manage specific departments
How do marketing economies work?
As a business grows it can:
- Purchase marketing that has a larger scope and potentially attract more customers
- Negotiate better terms for buying more advertising space at once
