1. AdduHigh schoolDepartment of business studiesPrepared byShijumonXavier 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

2. Economies of Scale 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

3. 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 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

4. Economies of Scale Internal – advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

5. Economies of Scale External economies of scale – the advantages firms can gain as a result of the growth of the industry – normally associated with a particular area Supply of skilled labour Reputation Local knowledge and skills Infrastructure Training facilities 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

7. Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility

8. What happens and why?6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

10. PER UNIT has fallen

11. Don’t get confused between Total Cost and Average Cost

12. Overall ‘costs’ will rise but unit costscan fall

13. Why?6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

14. Economies of Scale Internal: Technical Specialisation – large organisations can employ specialised labour Indivisibility of plant – machines can’t be broken down to do smaller jobs! Principle of multiples – firms using more than one machine of different capacities - more efficient Increased dimensions – bigger containers can reduce average cost 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

15. Economies of Scale Indivisibility of Plant: Not viable to produce products like oil, chemicals on small scale – need large amounts of capital Agriculture – machinery appropriate for large scale work – combines, etc. 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

16. Economies of Scale Principle of Multiples: Some production processes need more than one machine Different capacities May need more than one machine to be fully efficient 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

17. Economies of Scale Principle of Multiples: e.g. Company A = 1 of each machine, output per hour = 10 Total Cost = £500 AC = £50 per unit Company B = 6 x A, 3 x B, 4 x C, 2 x D – output per hour = 60 Total Cost = £1750 AC = £29.16 per unit 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

18. 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 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

19. Economies of Scale Commercial 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 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

20. Economies of Scale Financial Large firms able to negotiate cheaper finance deals Large firms able to be more flexible about finance – share options, rights issues, etc. Large firms able to utilise skills of merchant banks to arrange finance 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

21. Economies of Scale Managerial Use of specialists – accountants, marketing, lawyers, production, human resources, etc. 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

22. Economies of Scale Risk Bearing Diversification Markets across regions/countries Product ranges R&D 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

23. Economies of Scale Minimum Efficient Scale – the point at which the increase in the scale of production yields no significant unit cost benefits Minimum Efficient Plant Size – the point where increasing the scale of production of an individual plant within the industry yields no significant unit cost benefits. 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

24. Economies of Scale Unit Cost Scale A Scale B 82p 54p LRAC MES Output 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics

25. 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 6/20/2011 Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics