- Economies of scale
- Economies of scale describe the situation where, as a firm's quantity of output goes up, its cost per unit goes down.
- Diseconomies of scale
- Diseconomies of scale describe the situation where, as the level of output and the scale rise, average costs rise as well.
Sources of economies of scale
Can you name five internal economies of scale?
Each is a reason a bigger firm can make or sell each unit more cheaply.
Technical economies are savings from larger plant and machinery: bigger, more specialised equipment turns out each unit with fewer inputs, so a larger factory can produce at a lower average cost than a smaller one.
Can you think of an example?
The material in a pipe depends on its circumference, while the volume it carries depends on its cross-section. A pipe using twice the material carries four times the volume, so a bigger chemical plant makes each unit more cheaply.
Purchasing economies are savings from buying inputs in bulk, which wins the firm a lower price per unit from its suppliers.
Can you think of an example?
A national supermarket chain ordering ten million tins of beans a year pays 30p a tin. A corner shop ordering two thousand tins pays 45p.
Financial economies are savings on borrowing, because lenders see a large firm as safer and charge it a lower rate of interest.
Can you think of an example?
The chain borrows £100 million for new shops at 5% interest. The corner shop, borrowing £50,000 for a refit, is charged 9%.
Managerial economies are savings from hiring specialist managers, each doing one job well, which a small firm cannot afford to employ.
Can you think of an example?
A chain of two hundred shops employs a full-time buyer, a logistics manager and an accountant. The owner of a single shop does all three jobs herself.
Marketing economies are savings from spreading one advertising campaign across far more sales, so it costs less per unit sold.
Can you think of an example?
The chain's national television campaign costs £5 million, which across £2 billion of sales adds a quarter of a penny to each pound taken.