Economies of Scale
Larger firms benefit more from economies of scale and can produce goods more cheaply. Average cost is affected by the economies of scale meaning larger firms produce at lower average costs.
Easy definition : the falling average costs that are a cause of expansion.
The main internal economies of scale
Purchasing economies
Basically bulk buying
Technical economies
More investments into capital
Marketing economies
Spreading the fixed cost of promotion over a larger level of output.
Financial economies
Larger firms have higher power over the negotiation of loans from banks.
Managerial economies
Large firms can afford specialist managers
Risk bearing economies
Branching out into other markets
Purchasing economies
Basically bulk buying
Technical economies
More investments into capital
Marketing economies
Spreading the fixed cost of promotion over a larger level of output.
Financial economies
Larger firms have higher power over the negotiation of loans from banks.
Managerial economies
Large firms can afford specialist managers
Risk bearing economies
Branching out into other markets
Average cost curve
Diseconomies of scale are the rising average costs when a firm becomes too big.
Reasons for diseconomies of scale:
- Bureaucracy
- Labour relations
- Control and co-ordination
External economies of scale
Sometimes all firms in an industry can enjoy falling average costs as the whole industry grows.
This is called external economies of scale.
This is called external economies of scale.
- Skilled labour (
- Infrastructure
- Ancillary and commercial services
- Cooperation