Economies of ScaleEconomies of Scale

As a firm increases its output, As a firm increases its output, investment is required to support the investment is required to support the growth leading to higher costs. Once growth leading to higher costs. Once

the investment has been made it leads the investment has been made it leads higher output where the average cost higher output where the average cost

of production per item falls.of production per item falls.

An example of this:An example of this:

Lansdale Wollens operated a small Lansdale Wollens operated a small factory making jumpers.factory making jumpers.

Factory was suitable to make 30 Factory was suitable to make 30 jumpers per week.jumpers per week.

Has built an extension so they can Has built an extension so they can now make 50 jumpers per week.now make 50 jumpers per week.

Their total costs have gone up BUT so Their total costs have gone up BUT so has their capacity which means they has their capacity which means they can make more jumpers per week.can make more jumpers per week.

What this means for the costsWhat this means for the costs

Original factory – Original factory – £900£900 (total cost) (total cost)

30 (number of jumpers made)30 (number of jumpers made)

= £30 per jumper= £30 per jumper

New factory –New factory –

£1000 £1000 (total cost)(total cost)

50 (number of jumpers made)50 (number of jumpers made)

= £20 per jumper= £20 per jumper

What does this mean?What does this mean?

The average cost of production has The average cost of production has fallen as the capacity has fallen as the capacity has increased. increased.

This is economies of scale.This is economies of scale.

Different typesDifferent types

There are 6 different types of There are 6 different types of economies of scale.economies of scale.

All of which will lead to reduced All of which will lead to reduced average costs.average costs.

Technical economiesTechnical economies

A business saves on production costs A business saves on production costs by using better methods and by using better methods and equipmentequipment

Managerial economiesManagerial economies

A business can employ specialist A business can employ specialist managers who improve efficiencymanagers who improve efficiency

Financial economiesFinancial economies

A business does not have to pay out A business does not have to pay out as much money to raise financeas much money to raise finance

Risk-bearing economiesRisk-bearing economies

A business has a range of products or A business has a range of products or services, so is not dependant on one services, so is not dependant on one productproduct

Purchasing economiesPurchasing economies

A business is given a discount for A business is given a discount for purchasing in large quantitiespurchasing in large quantities

Marketing economiesMarketing economies

A business saves on advertising and A business saves on advertising and transport coststransport costs

Look at the following examples and Look at the following examples and add them to the relevant economyadd them to the relevant economy

Evergreen Treescapes decides to branch Evergreen Treescapes decides to branch out and offer a lawn fertilising and weed-out and offer a lawn fertilising and weed-killing service in order to obtain new killing service in order to obtain new customers.customers.

Busy Buses Ltd decides to replace its Busy Buses Ltd decides to replace its single-decker buses with double deckers.single-decker buses with double deckers.

Jensen Fabrics Ltd is able to negotiate a Jensen Fabrics Ltd is able to negotiate a lower rate of interest on bank loans than lower rate of interest on bank loans than its smaller competitors.its smaller competitors.

Marks and Spencer plc can afford to Marks and Spencer plc can afford to employ specialist buyers to negotiate employ specialist buyers to negotiate deals with clothing suppliers.deals with clothing suppliers.

Look at the following examples and Look at the following examples and add them to the relevant economyadd them to the relevant economy

Holden’s supermarket chain decides to open Holden’s supermarket chain decides to open a chain of petrol stations.a chain of petrol stations.

Bowton Brewery Ltd starts to sell food Bowton Brewery Ltd starts to sell food through its public houses.through its public houses.

Austin Engineering Ltd switches production of Austin Engineering Ltd switches production of its hydraulic equipment yo a larger factory its hydraulic equipment yo a larger factory using computer controlled machinery.using computer controlled machinery.

The growth of Home Soon Coaches leads to The growth of Home Soon Coaches leads to the employment of more office staff. This the employment of more office staff. This allows people to specialise in one area of allows people to specialise in one area of work.work.

Look at the following examples and Look at the following examples and add them to the relevant economyadd them to the relevant economy

Johnstone’s Logistics has reorganised it’s Johnstone’s Logistics has reorganised it’s structure. It now employs a specialist structure. It now employs a specialist manager for each department rather than manager for each department rather than having managers responsible for several having managers responsible for several departments.departments.

When Munro Toys plc bought Talbot Toys When Munro Toys plc bought Talbot Toys Ltd its production doubled. The amount it Ltd its production doubled. The amount it spent on advertising rose by 50 percent.spent on advertising rose by 50 percent.

The Spice Garden Restaurant extends the The Spice Garden Restaurant extends the size of its restaurant from 50 to 80 seats size of its restaurant from 50 to 80 seats but only takes on one extra waiter.but only takes on one extra waiter.

Growth is not always a good thingGrowth is not always a good thing

A firm can experience diseconomies A firm can experience diseconomies of scale.of scale.

The firm becomes too big to be The firm becomes too big to be managed efficiently.managed efficiently.

Average costs do not fall as a result Average costs do not fall as a result of the larger size.of the larger size.

Diseconomies of ScaleDiseconomies of Scale

This happens when the business gets too This happens when the business gets too big to benefit from a cut in costs and big to benefit from a cut in costs and prices start to rise. Happens because:prices start to rise. Happens because: Bureaucracy – Too much form filling and Bureaucracy – Too much form filling and

admin, slow decision makingadmin, slow decision making Labour relations – Lack of understanding Labour relations – Lack of understanding

between workers if too big, hard to between workers if too big, hard to communicatecommunicate

Control and co-ordination – More supervision Control and co-ordination – More supervision needed to control really large businesses needed to control really large businesses increasing costsincreasing costs

Exam question – 12 marksExam question – 12 marks

Jenston Superstores plc operates a large chain Jenston Superstores plc operates a large chain of superstores. In recent years large retailers of superstores. In recent years large retailers like Jenston Superstores plc have increased like Jenston Superstores plc have increased their share of the market. What are the their share of the market. What are the reasons for their success? reasons for their success? ECONOMIES OF ECONOMIES OF SCALESCALE

Talk about each economy, say what it is, how it Talk about each economy, say what it is, how it has helped them and how it has helped to has helped them and how it has helped to increase market share and make them a increase market share and make them a successsuccess