economies of scale.pptx
TRANSCRIPT
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Economies of Scale
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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
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Economies of Scale
Capital Land Labour Output TC AC
Scale A ! " #$$
Scale % #$ & ' !$$
Assume each unit of capital = $5, Land = $8and Labour = $2
Calculate TC and then AC for the two differentscales si!es" of production facilit# hat happens and wh#%
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Economies of ScaleCapital Land Labour Output TC ACScale A ! " #$$ $
Scale % #$ & ' !$$ #&" $"
&oublin' the scale of production a rise of ())*" has ledto an increase in output of 2))* + therefore cost of
production -. /01Thas fallen &ont 'et confused between Total Cost and Aera'e Cost 3erall costs will rise but unit costscan fall Why?
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Economies of Scale
Increased Dimensions:e.g.
5m
2m
2m
Transport container = 4olume of 2)m
Total Cost:Construction, drier, fuel,maintenance, insurance, road ta6 =$7)) per ourne#
AC = $30m3
9m
()m
9m
Transport Container 2 = 4olume (7)m
Total Cost= $(8)) perourne#AC = $11.!m3
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Economies of Scale
Marketing
*arge firms can negotiate favoura+le
prices as a result
of +u,ing in +ul-
*arge firms ma, have advantages in
-eeping prices higher +ecause
of their mar-et power
*ower advertising cost per unit
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Economies of Scale
Financial
*arge firms a+le to negotiate cheaper
finance deals. *ower interest rates
*arge firms a+le to utilise s-ills of
merchant +an-s to arrange finance
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Economies of Scale
Managerialse of specialists accountants0
mar-eting0 law,ers0 production0human resources0 etc
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Economies of Scale
Technical economies1iversification and increased
specialisation2ndivisi+ilit, of machiner, (+ig firm can
ta-e advantage of large machiner,
Eg Co-e3s +ottling machine 4s 5r6ohnson3s home +rew
781
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1iseconomies of Scale
The disadvantages of large scaleproduction that can lead to increasingaverage costs9ro+lems of management5aintaining effective communicationCo.ordinating activities often across
the glo+e:1e.motivation and alienation of staff1ivorce of ownership and control
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Ta+le for ;arve,3s %i-es
Year ofproduction
Output-Bikes produced
in 1 year
TC-How much all
costs will be toHarvey Bikes
AC-Cost per unit
of output
!!" 1!! 1!!#!!!
!!$ 1!!! "!!#!!!
!1! 1!!!! %#!!!#!!!
!11 1!!!!! &!#!!!#!!!
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Year ofproduction
Output-Bikes produced
in 1 year
TC-How much all
costs will be toHarvey Bikes
AC-Cost per unit of
output
!!" 1!! 1!!#!!! 1!!!
!!$ 1!!! "!!#!!! "!!
!1! 1!!!! %#!!!#!!! %!!
!11 1!!!!! &!#!!!#!!! &!!
Create a graph to show the a+ove information
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AC
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rom ,our graph>
# ?hat has happened +etween @$$' and
@$#$
@ Bive three possi+le causes for the
trend ,ou gave in uestion #
! ?hat has happened in @$## Bive
possi+le reasons for this change