Economies of Scale

Question 1

Technical

Answer 1

• These occur when a firm can produce goods or services more efficiently as it increases its scale of production
• Factors such as specialisation of labour, better utilisation of machinery and improved production processes can lead to technical economies of scale
• Railway networks + electricity supply have overhead costs which are highly significant + the largest firm in such a market will always be able to produce at a lower average than small firms  competitive advantage  natural monopoly

Question 2

Managerial

Answer 2

• Larger firms may benefit from having specialised management teams, better coordination + more efficient decision making processes —> can result in cost savings + increased efficiency
• However as firms become very large, the management structure can become overly complex + less efficient
• Communications breakdowns + bureaucracy may increase leading to higher costs

Question 3

Marketing

Answer 3

• Advertising is usually a fixed cost + this is spread over more units for large firms so the cost per unit is lower as a firm increase its scale of production
• As a firm grows large they often have more resources to allocate to marketing + advertising efforts —> can lead to lower advertising costs per unit sold + increased market presence
• Larger firms also benefit from brand awareness as products from a well-known brand will be trusted by consumers + might mean a larger firm doesn’t need to advertise as much

Question 4

Financial

Answer 4

• A large firm with a strong reputation may be able to raise finance for further expansion on more favourable terms than a small firm  this reinforces the market position of the largest firms in a sector + make it more difficult for relative newcomers to be established
• They have access to more favourable financing options including lower interest rates on loans + better terms from suppliers due to their size and financial stability

Question 5

Purchasing

Answer 5

• Purchasing its inputs (raw materials, energy, and transport services) in relatively large volumes
• When buying bulk in this way, firms are able to negotiate good deals with their suppliers + reduce average cost as output increases
• Some of the firms suppliers will find it beneficial to locate in proximity to the firms factory which would reduce costs even more

Question 6

Risk Bearing

Answer 6

• Larger firms can diversify into different product areas + markets  leads to a more predictable overall demand e.g. if demand for one product in a country falls, there’s likely to be a different product whose demand somewhere increase
• Also large firms are able to take risks by launching products that may or may not be popular + if the product is unsuccessful, the firms other activities allow it to absorb the cost of failure more easily
• Larger firms may be better equipped to handle unexpected market fluctuations + risks reducing the overall cost of risk management