1 / 17

Internal Economies of Scale

Internal Economies of Scale. 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 – spread total costs over a greater range of output. Internal Economies of Scale.

Download Presentation

Internal Economies of Scale

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Internal Economies of Scale

  2. 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 – spread total costs over a greater range of output

  3. Internal Economies of Scale – advantages that arise as a result of the growth of the firm • Technical • Commercial (purchasing and Marketing) • Financial • Managerial • Risk Bearing

  4. Demonstration • 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?

  5. Demonstration, 2 • 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 costscan fall • Why?

  6. Technical • Specialisation – large organisations can employ specialised labour • Indivisibility of plant – machines can’t be broken down to do smaller jobs! • Principle of multiples – firms using more than one machine of different capacities - more efficient • Increased dimensions – bigger containers can reduce average cost

  7. Indivisibility of Plant • Not viable to produce products like oil, chemicals on small scale – need large amounts of capital • Agriculture – machinery appropriate for large scale work – combines, etc.

  8. Principle of Multiples • Some production processes need more than one machine • Different capacities • May need more than one machine to be fully efficient

  9. Principle of Multiples, example Company A = 1 of each machine, output per hour = 10 Total Cost = £500 AC = £50 per unit Company B = 6 x A, 3 x B, 4 x C, 2 x D – output per hour = 60 Total Cost = £1750 AC = £29.16 per unit

  10. Increased Dimensions, Example Transport container = Volume of 20m3 Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = £600 per journey AC = £30m3 2m 2m 5m Total Cost = £1800 per journey AC = £11.25m3 4m 4m 10m Transport Container 2 = Volume 160m3

  11. Commercial – Purchasing and marketing • Large firms can negotiate favourable prices as a result of buying in bulk (purchasing) • Large firms may have advantages in keeping prices higher because of their market power (marketing)

  12. Financial • Large firms able to negotiate cheaper finance deals • Large firms able to be more flexible about finance – share options, rights issues, etc. • Large firms able to utilise skills of merchant banks to arrange finance

  13. Managerial • Use of specialists – accountants, marketing, lawyers, production, human resources, etc.

  14. Risk Bearing • Diversification • Markets across regions/countries • Product ranges • R&D

  15. Economies of Scale Minimum Efficient Scale – the point at which the increase in the scale of production yields no significant unit cost benefits Minimum Efficient Plant Size – the point where increasing the scale of production of an individual plant within the industry yields no significant unit cost benefits

  16. Economies of Scale Unit Cost Scale A 82p Scale B 54p LRAC MES Output

  17. 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

More Related