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Economies of Scale - Coggle Diagram
Economies of Scale
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- Technical Economies of Scale.
Gained in situations where the business can cut its production costs by introducing upgraded technology or by altering its production methods.
Inceeased mechanisation will speed up production and allow the business to use the flow manufacturing method.
In this way, costs of labour and power are lowered per unit and overhead expenses such as rates are more effectively used.
Large businesses usually can afford more advanced technology than small businesses, so technical economies of scale are often of more benefit to larger businesses.
- Marketing Economies of Scale
Gained in situations where the business can save on expenses associated with marketing such as advertising and distribution.
EG: it costs the same sum to deliver ten boxes of goods in one lorry load as it does to deliver a single box of goods in one consignment and pick up other goods on the return journey to use the vehicle economically.
A large business is charged the same rate for advertising as a small business. However, in a large business advertising expenditure is less per unit of production than it is in a small business, which is producing on a smaller scale.
For this reason, a large business can afford to undertake more advertising than a sma business can.
The larger business is also likely to increase its sales, as a result of the advertising, by more than the smaller business.
- Purchasing Economies of Scale
Gained when large companies are able to purchase goods in bulk. They will be given discount for buying in bulk which reduces the price per unit they pay.
A small business will not be able to purchase in bulk and therefore does not get the same level of discount.
These higher costs are then passed onto the customer, giving the large business an advantage.
- Financial Economies of Scales
Gained in situations where the business can borrow money or otherwise gain finance by cheap methods.
Large businesses provide better security and fewer risks for banks, therefore banks are willing to allow them to borrow larger sums for longer periods of time and at better rates of interest.
Gained when a business increases its production and this causes a decrease in average production costs.