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Economies of Scale

Economies of Scale. Economies of Scale. The advantages of large scale production that result in lower unit (average) costs (cost per unit) AC = TC / Q Economies of scale – spreads total costs over a greater range of output. Economies of Scale.

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Economies of Scale

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  1. Economies of Scale

  2. Economies of Scale • The advantages of large scale production that result in lower unit (average) costs (cost per unit) • AC = TC / Q • Economies of scale – spreads total costs over a greater range of output

  3. Economies of Scale • Assume each unit of capital = $5, Land = $8 and Labour = $2 • Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility • What happens and why?

  4. Economies of Scale • Doubling the scale of production (a rise of 100%) has led to an increase in output of 200% - therefore cost of production • PER UNIT has fallen • Don’t get confused between Total Cost and Average Cost • Overall ‘costs’ will rise but unit costscan fall • Why?

  5. Economies of Scale Increased Dimensions: e.g. Transport container = Volume of 20m3 Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = $600 per journey AC = $30m3 2m 2m 5m Total Cost = $1800 per journey AC = $11.25m3 4m 4m 10m Transport Container 2 = Volume 160m3

  6. Economies of Scale • Marketing • Large firms can negotiate favourable prices as a result of buying in bulk • Large firms may have advantages in keeping prices higher because of their market power • Lower advertising cost per unit

  7. Economies of Scale • Financial • Large firms able to negotiate cheaper finance deals- Lower interest rates • Large firms able to utilise skills of merchant banks to arrange finance

  8. Economies of Scale • Managerial • Use of specialists – accountants, marketing, lawyers, production, human resources, etc.

  9. Economies of Scale • Technical economies • Diversification and increased specialisation • Indivisibility of machinery (big firm can take advantage of large machinery. E.g. Coke’s bottling machine Vs Mr Johnson’s home brew • R&D

  10. Diseconomies of Scale • The disadvantages of large scale production that can lead to increasing average costs • Problems of management • Maintaining effective communication • Co-ordinating activities – often across the globe! • De-motivation and alienation of staff • Divorce of ownership and control

  11. Table for Harvey’s Bikes

  12. Create a graph to show the above information

  13. AC Output

  14. From your graph….. • What has happened between 2008 and 2010? • Give three possible causes for the trend you gave in question 1? • What has happened in 2011? Give possible reasons for this change

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