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Economies of scale
Economies of scale lead to reductions in unit costs as the scale of operation increase.
Average costs
Scale of operation
This refers to any increase in the capacity of a business. It could be achieved by: Buying new machinery
Building a bigger factory / shop / plane / ship Merger
Human resource managers now recruit better suited candidates who fit with the organisations needs and culture. Employees stay longer, are more motivated and more productive.
Production managers can re-arrange production so that it is more efficient and they have better knowledge regarding what equipment to purchase.
External economies
These occur when an industry develops in a certain area: Pool of trained workers Ancillary services marketing, accountancy to cleaning Co-operation between businesses eg on research and development Development of specialist suppliers of components and raw materials
Limits?
There are likely to be limits to economies of scale. How large can machinery get? How large can markets get? How large can a plane get!? You get the idea?
Diseconomies of scale
Business can become too large. Unit costs can then tend to rise. Causes: Communication hierarchical structure, information overload,
formal methods, less face to face, language.
Do diseconomies exist?
Evidence suggests that unit costs may not rise as the scale of production increases beyond an optimum scale.
Task! Diseconomies can be addressed. Consider how each can be overcome within a multi-national business.
Exploit economies of scale Increase profits Increase market share / sales Obtain monopoly power be the market leader on price Diversify thus reduce risk
Task! Question 2, page 588 and Question 3b, page 589 (3 X 5 marks)
Reasons
Also.
Large or small?
Which is best suited to: Car manufacturing Dentistry Food retail For each of these evaluate by completing a sentence beginning with To some extent it depends on Write at least one more sentence to complete your evaluation.