The Guide to Business studies

Economy of scale

Which company can make cars more cheaply? Why?

Toyota Puegot

Economy of Scale

As a company gets bigger, it can make things more cheaply.

Definition = As a company increases its scale of production average costs fall.

+ Therefore, the cars Toyota produce will be a lot cheaper since the cost per unit is relatively lower

Economies of scale

If It costs Nike 2000 HKD to make 100 pair of these shoes, the average price per unit of the shoe will be 200

If the Firm have bulk buying, it will cost Nike 20000 HKD to make 2000 pairs of these shoes therefore, the cost per unit of these shoes will be 100

The Types of Economies of Scale

For Example,

Technical economies of scale- Large-scale businesses can afford to invest in expensive and specialist capital machinery

Financial economies of scale- Larger firms are usually rated by the financial markets to be more ‘credit worthy’ , therefore smaller firms will have higher interest rate compared with the larger ones

Types of Economies of scale

Purchuasing Economies of scale- buying in bulk means that you will normally receive a discount from the supplier.

Example: these are similar to when you go into a supermarket and are able to buy individual items cheaper in a multipack.

Marketing economies - as a firm grows the average cost of advertising per unit will fall, leading to lower average costs.

e.g., small firms are unable to afford large scale advertising campaigns, while their larger competitors are able to  finance television and radio campaigns using above the line promotion.

External Economies of Scale

Labour force

Support services and suppliers

Co-operation