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Understanding Economies of Scale: A Case Study on Toyota and Billington's Custom Cars

This piece explores the concept of economies of scale and its impact on production costs, specifically looking at Toyota and Billington's custom cars. It explains how larger production scales can lead to lower average costs, using real-world examples and calculations. The discussion also touches on internal and external economies of scale, as well as diseconomies of scale, which can affect prices, customer numbers, and profitability. Additionally, it examines reasons why small businesses might thrive despite larger competitors.

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Understanding Economies of Scale: A Case Study on Toyota and Billington's Custom Cars

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Presentation Transcript

  1. Economies of scale

  2. Toyota Billington’s custom cars Which company can make cars more cheaply? Why?

  3. Economies of scale • As a company gets bigger, it can make things more cheaply. • Definition = As a company increases its scale of production average costs fall.

  4. Average costs • If the total cost of making 100 cars is $1,000,000, the average cost is $10,000 per car. • If the total cost of making 1,000 cars is $2,000,000, the average cost is ????

  5. Take a minute • You manage a supermarket. As a result of growth, you have achieved economies of scale. • How will this effect the prices you charge, number of customers, and profits?

  6. Internal Economies of scale • Technical • Managerial • Financial

  7. Internal Economies of scale • Purchasing • Marketing • Risk-bearing

  8. External Economies of Scale • Labour force • Support services and suppliers • Co-operation

  9. Diseconomies of Scale • Definition = Increasing average costs as a result of an increase in the scale of operation • Co-ordination • Motivation • Communication

  10. In pairs • Explain the Economies and Diseconomies of scale Starbucks may achieve. • Jogjakarta is a centre for Batik. What external economies of scale might there be for Batik businesses in Jogjakarta

  11. Reasons for small business surviving • Diseconomies of scale • Size of the market • Flexibility • Personal Service

  12. Case study • Pg593 a-d

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