8 3 Scale of production ECONOMIES OF SCALE

8. 3 Scale of production ECONOMIES OF SCALE

Discuss �What are some advantages that big companies have over small ones? �What are some advantages that big industries have over small ones? �Are there any negatives from a company being too big?

Economies of scale Part of Microeconomics �Focuses on costs and the positives of a business growing larger �Usually related to production so outputs can be produced at a lower unit cost �As we go through the other internal economies of scale mentioned in the book, choose an organisation and think about how each economy of scale is used by them

Internal � Producing more outputs resulting in lower unit costs. � Labour and management – Employing specialist staff to help eg. Accountants � Buying and selling economies – Buying in bulk to negotiate cheaper prices. Saves money on transportation and per unit cost � Financial economies – The ability to borrow more money due to being seen as a safer investment � Risk-bearing economies – Diversification, lower risk due to selling many different types of products eg. Cadbury, Apple � *Economies of scope – Similar to economies of scale as large firms are able to use their existing resources to diversify into related markets eg. Soft drink company that uses its marketing and distribution network to start producing and selling alcoholic drinks

External economies of scale �Economies of concentration – Companies with growing industries can enjoy benefits such as transport and communication, availability of raw materials (suppliers moving closer) and research and innovation. (Business hubs eg. Silicon valley) �Economies of information – Large industries are able to invest in specialist research to further improve that businesses in that industry eg. Green energy technology

Diseconomies of scale � Internal - If an organisation becomes too large, its costs may increase as more managers need to be hired, more employees and more facilities. They may also not be as efficient in their activities. Communication may not be as quick or simple as there are too many people which may also lead to them having a slower reaction to the market. � External – If too many businesses are gather in one place it may cause congestion and pollution in a particular area. It may also result in too much competition meaning average prices will fall. (Sanlitun)

Constant returns to scale Economy of scale Diseconomies of scale

8. 4 Kaizen �Known as ‘continuous improvement’ �A philosophy of business created by the Japanese (Toyota) to continuously improve all aspects of work. �Employees are responsible at each stage to identify and suggest ways to improve production no matter how small it is. This results in a final product that is of high quality and low waste usage.

Activity �Get into groups of two-three. �Look at activity on page 110 and 111 and complete both activities �Make sure to remember and write down your answers!

Homework • Understand the different internal and external economies and diseconomies of scale that affect large organisations and industries • Look at activity on page 110 and 111 and complete activities • Summary question 1+2+3 • Short answer question 7+8 on page 124