economies of scale

• Marketing economies of scale occur when a firm can spread its advertising and promotional costs over a larger output, resulting in lower average costs.
• Cost advantages reaped by companies as they grow and production becomes efficient. 
• When average costs of production begins to fall as the firm operates on a larger scale due to an improvement in productive efficiency. 
• 1. Fixed costs: Costs that do not change with production
• 1. Variable costs: Costs that change with production
• Total costs = FIXED COSTS    +   VARIABLE COST
• Optimal level = Average costs are LOWEST at this point. 
• Why do businesses pursue EOS?

  1. Reduced cost of production - gives the flexibility on product pricing
  2. Increased profit margins of the business
  3. More funds for investment
  4. Better dividends to shareholders - easier investment options in the future
• Internal economies of scale is a reduction in average costs of production due to a combination of factors that occur within an organization
• External economies of scale is a reduction in average costs of production due to a combination of factors that occur outside an organization
• Diseconomies of scale: Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings and poor management of resources.
• Economies of scale: These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).
• External economies of scale: Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e. all firms in the industry benefit.
• Financial economies of scale: Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.
• Internal economies of scale: Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.
• Managerial economies of scale: Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.
• Marketing economies of scale: Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.
• Optimal output level: The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximised.
• Purchasing economies of scale: Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).
• Risk bearing economies of scale: Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.
• Specialization economies of scale: Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity and efficiency (thereby cutting average costs of production).
• Technical economies of scale: Cost savings by greater use of large-scale mechanical processes and specialist machinery, e.g. mass production techniques.