Unit Costs and Efficiency

• Average cost per unit

  Total production costs in period (£) / Total output in period
• Economies of scale

  Unit costs fall and output increases
• Internal economies of scale

  Arise from the increased output of the business itself
• External economies of scale


  Occur within an industry (All competitors benefit)
• Internal economies of scale

  • Buying economies
  • Technical
  • Network
  • Financial
• Buying economies

  Buying in greater quantities usually results in lower price (Bulk buying)
• Technical (Internal Economies of Scale)

  Use of specialist equipment or processes to boost productivity
• Network (Internal Economies of Scale)

  Adding extra customers or users to a network that is already established (Eg. Mobile phones)
• Financial (Internal Economies of Scale)

  Larger firms benefit from access to more and cheaper finance
• External economies of scale

  Often associated with particular geographic areas (Eg. Having many specialist suppliers close by)
• Labour intensive

  Production relies on using labour resources
• Capital intensive

  Production relies on using capital resources
• Labour intensive industries

  • Food processing
  • Hotels and restaurants
  • Hairdressing
• Capital intensive industries

  • Car manufacturing
  • Oil extraction
  • Transport infrastructure
• Implications of resource intensity - Labour intensive

  • Labour costs higher than capital costs
  • Costs are mainly variable = lower breakeven output
  • Firms benefit from access to sources of low-cost labour
• Implications of resource intensity - Capital intensive

  • Capital costs higher than labour costs
  • Costs are mainly fixed = higher breakeven output
  • Firms benefit from access to low-cost, long-term borrowing
• Benefits of capital intensity

  • Greater opportunities for economies of scale
  • Potential for significantly better productivity
  • Better quality and speed of production
  • Lower labour costs
• Drawbacks of capital intensity

  • Significant investment
  • Potential for loss of competitiveness due to obsolescence
  • May generate resistance to change from the labour force
• Benefits of labour intensity

  • Units costs may still be low in low wage locations
  • Labour is a flexible resource - through multi-skilling and training
  • Labour at the heart of the production process - can help continuous improvement
• Drawbacks of labour intensity

  • Greater risk of problems with employee/employer relationship
  • Potentially high costs of labour turnover (recruitment etc)
  • Need for continuous investment in training