1. 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 – spreads total costs over a greater range of output

3. Economies of Scale
Internal – advantages that arise as a result of the growth of the firm
Technical
Marketing
Financial
Managerial
Risk Bearing
Purchasing

4. Economies of Scale
Capital
Land
Labour
Output TC AC
Scale A 5 3 4
100
Scale B 10 6 8
300
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. Economies of Scale
Capital
Land
Labour
Output TC AC
Scale A 5 3 4
100 57
0.57
Scale B 10 6 8
300
164
0.54
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 costs can fall

6. 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

7. Optimum efficient scale of production
Costs AC
Units