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Economies of Scale - Coggle Diagram
Economies of Scale
Costs in the short and long run
In the short run costs can be both variable and fixed, but in the long run all costs become variable.
For example, rent negotiated over a 12 month contract is a fixed cost in the short run. But, if rent rises after 12 months, then it too is regarded as a variable cost.
Each business’s long run average cost curve is made up of a series of short run average cost curves.
Therefore within every fixed cost there is also a variable cost in the long term
As a business grows it moves from one short run average cost curve to another, each one being lower which reduces the average costs of output.
Internal and external economies of scale
Internal economies of scale
Reductions in average cost per unit of output as a result of increasing internal efficiencies of the business.
Types of Internal economies of scale
Marketing
As businesses grow, each pound (£) spent on advertising will have greater benefit for the business.
Technical
As businesses grow they are able to purchase the latest equipment and incorporate new methods of production.This increases efficiency and productivity, reducing average costs of output.
Managerial
As businesses employ specialist managers. These managers will know how to get the best value for each pound (£) spent. This will increase efficiency and thereby reduce the average costs of producing goods and selling the goods or services on offer.
Financial
As businesses grow they will have access to a wider range of finance. As the assets of businesses grow, they are able to offer more security when seeking to borrow money. As a result, larger businesses can often negotiate more favourable rates of interest on any money they do borrow.
Purchasing
As businesses grow they increase the size of orders for raw materials or components. This may then result in discounts being given and the cost of each individual component purchased will fall.
External economies of scale
Financial
Supplier
Services
Educational
The reduction in average costs of production that occur as a business increases its scale of production