Economies of Scale Economies of Scale The advantages

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Economies of Scale

Economies of Scale

Economies of Scale • The advantages of large scale production that result in lower

Economies of Scale • The advantages of large scale production that result in lower unit (average) costs (cost per unit) • AC = TC / Q • Economies of scale – spreads total costs over a greater range of output

Economies of Scale • Internal – advantages that arise as a result of the

Economies of Scale • Internal – advantages that arise as a result of the growth of the firm – Technical – Marketing – Financial – Managerial – Risk Bearing – Purchasing

Economies of Scale Capital Land Labour Output Scale A 5 3 4 100 Scale

Economies of Scale Capital Land Labour Output Scale A 5 3 4 100 Scale B 10 6 8 300 TC AC • Assume each unit of capital = £ 5, Land = £ 8 and Labour = £ 2 • Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility • What happens and why?

Economies of Scale Capital Land Labour Output TC AC Scale A 5 3 4

Economies of Scale Capital Land Labour Output TC AC Scale A 5 3 4 100 57 0. 57 Scale B 10 6 8 300 164 0. 54 • Doubling the scale of production (a rise of 100%) has led to an increase in output of 200% - therefore cost of production • PER UNIT has fallen • Don’t get confused between Total Cost and Average Cost • Overall ‘costs’ will rise but unit costs can fall

Diseconomies of Scale • The disadvantages of large scale production that can lead to

Diseconomies of Scale • The disadvantages of large scale production that can lead to increasing average costs – Problems of management – Maintaining effective communication – Co-ordinating activities – often across the globe! – De-motivation and alienation of staff – Divorce of ownership and control

Optimum efficient scale of production Costs AC Units

Optimum efficient scale of production Costs AC Units