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Economies of Scale Introduction Economies of scale occur when costs per unit fall as a firm grows. Economies of scale are the main advantage of increasing the scale of production and becoming ‘big’. Why are economies of scale important? Firstly, because a large business can pass on lower costs to customers through lower prices and increase its share of a market. Secondly, a business could choose to maintain its current price for its product and accept higher profit margins. Internal Economies of Scale Internal economies of scale relate to the lower unit costs a single firm can obtain by growing in size itself. There are five main types of internal economies of scale. Bulk-buying economies As businesses grow they need to order larger quantities of raw materials As the order value increases, a business obtains more bargaining power with suppliers. It may be able to obtain discounts and lower prices for the raw materials. Technical economies As a business grows it can afford to buy more advanced machinery which can produce units more quickly and at lower costs Financial economies As a business grows it can get finance at cheaper rates of interest than smaller firms because lenders see them as less risky. Marketing economies The cost of marketing is spread over more units as production grows Managerial economies As a firm grows specialist more skillful manager scan be employed who should be more efficient. |