economies of scale
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Economies of scaleTRANSCRIPT
Strategic Cost Dynamics
Strategic Cost Dynamics
Strategic Cost Dynamics covers three Economics concepts.
Economies of Scale Economies of Scope Learning by Doing
Economies of Scale
Economies of Scale
Economies of Scale exist when larger-scale facilities, optimally used, provide lower average unit cost.
AC = TC / Q
Internal Economies of Scale
Internal – advantages that arise as a result of the growth of the firm.
Technical Commercial Financial Managerial Risk Bearing
Internal = growth of the firm
External 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
External = growth of
the Industry
Economies of Scale - Internal: Technical
Larger companies can afford bigger machines – which may produce more efficiently and do more tasks
More machines can mean less staff Machines can work 24/7 The larger the business the greater the number
of tasks that a piece of equipment will have to do.
Increased dimensions – bigger containers can reduce average cost
Bulk Buying Economies:Commercial
The larger the company the more it tends to buy in materials and components.
The larger the order the better the discounts and the less frequent deliveries also reduces delivery costs.
Supplier just uses a larger box/lorry rather than sending in lots of small packages.
Managerial Economies
The larger the company, the more specialized each manager can become.
In a small business, there is usually only one manager who has to do everything.
In a large business, there is a larger span of control, with specialist managers for each department.
Use of specialists – accountants, marketing, lawyers, production, human resources, etc
Financial Economies of Scale
The smaller the business, the greater the risk for a bank to lend you money.
The larger the business, the less of a risk – due to experience, more products, greater diversification, better specialist accounting managers.
Large firms able to negotiate cheaper finance deals
Risk Bearing
Greater Diversification Markets across
regions/countries Product ranges R&D
Economies of Scale
Unit Cost
Output
Scale A
Scale B
LRAC
MES
82p
54p
The larger the output the
lower the cost per unit!
Economy of Scope
Economy of scope occurs when there are benefits to combining the production of two or more products.
If a single firm can jointly produce goods X and Y more cheaply that any combination of firms could produce them separately, then the production of X and Y is characterized by economies of scope
Economy of Scope
Economies of scope arise from “complementarities” in the production or distribution of
distinct goods or services
Real world examples
Economies of scope between cable TV and high speed internet service.
Production of timber and particle board. Power generation and distribution. Joint cargo and passenger
transportation in airlines reduces excess capacity.
Global wholesale distribution of cheese, salad dressing, and cigarettes.
Learning By Doing
Average costs tend to fall as an organization gains experience with the manufacture of an object. The effect is called learning by doing.
Learning-by-doing is largely the result of improvements in methods and processes.
Learning By Doing
By: Vivek Kumar