Unit Costs and Efficiency

• Average Cost Per Unit

  Total Production costs in period (£)/ Total output in period (unit)
• Economies of scale is when unit costs fall as output increases
• Internal economies of scale arise from increased output of the business itself
• External economies of scale occur within an industry
• Internal economies of scale happens as a result of: Buying economies, Use of specialist equipment (Technical), Adding extra customers to an established network (Network) and Access to cheaper finance as firm grows (Financial)
• External economies of scale is often associated with particular geographic areas
• An example of external economies of scale is having many specialist suppliers close by
• Labour intensive production relies on using labour resources (Eg. employees)
• Capital Intensive production relies on using capital resources (Eg. equipment and machinery)
• Example of labour intensive industries includes: Hotels and restaurants and hairdressing
• An example of a Capital intensive industry is Car manufacturing
• Implications for labour intensive industries includes: Labour costs higher than capital costs meaning costs are mainly variable leading to a lower break even output.
• Implications of capital intensive industries includes: Capital costs are higher than labour costs meaning more fixed costs and a higher break even output.
• Capital Intensive industries benefit from access to low cost, long term borrowing.
• Benefits of Capital Intensity include: Economies of scale, Increased productivity, Better Speed of production and lower labour costs
• Drawbacks of Capital Intensity include: Significant Investment required, Risk of obsolescence and potential resistance to change from labour force.
• Benefits of labour intensity include: Unit costs may be low in low wage locations, Labour is a flexible resource and potential for continuous improvement.
• Drawbacks of Labour intensity include: Potential labour turnover costs, Continuous investment in training and risk of problems with employee/employer relationship