ECONOMIES OF SCALE

REVIEW OF ECONOMIES OF SCALE

 Financial Economies  These are cost savings as a result of the way in which large firms raise money.  A large firm may be able to sell shares on the stock exchange and this can be cheaper than borrowing money from a bank.  A large firm has more building and machines to offer as security to the bank so the bank are more likely to lend them money.  A large firm can be less risky and therefore borrow money at lower rates of interest. TYPES OF INTERNAL ECONOMY OF SCALE

 Marketing Economies of Scale  These are cost savings that result from the ways in which firms buy materials and sell their products.  A large firm can buy in bulk and therefore obtain goods at lower cost per unit.  A large firm can afford to employ specialist buyers who can obtain goods at lower cost.  A large firm can launch a very large advertising campaign because the cost per unit of the campaign is lower due to higher levels of output. TYPES OF INTERNAL ECONOMY OF SCALE

 Technical Economies of Scale  These are cost savings that result from the types of production methods used.  Large firms can employ specialist workers and machines which can produce more in a given period of time and at lower cost.  Large firms can transport their products in larger quantities and therefore the cost per unit for transport are lower.  Large firms can afford to undertake research and development in to new and faster methods of production. TYPES OF INTERNAL ECONOMY OF SCALE

 Risk-bearing Economies of Scale  Large firms can overcome the risks associated with production in many ways and therefore maintain high levels of output which can reduce the costs per unit of output.  Large firms buy from many suppliers so if one source of raw materials fail they have others to rely on.  Large firms sell a variety of products so if the demand falls for one product they have revenue from the others to rely on. TYPES OF INTERNAL ECONOMY OF SCALE