Purchasing & Technical

• What are the two main types of economies of scale?

  Purchasing economies and technical economies
• What are economies of scale?

  Reduction in average unit costs as output increases
• What happens to average unit costs as output grows?

  They decrease
• What is purchasing economies of scale?

  Cost savings from buying more raw materials
• How does a business negotiate better deals with suppliers?

  By increasing the quantity of raw materials purchased
• How much cocoa did Shock Sesh buy as a small business?

  Three tonnes
• What was the cost of three tonnes of cocoa for Shock Sesh?

  £9,000
• What was the average unit cost of cocoa when Shock Sesh bought three tonnes?

  £3,000 per tonne
• How much cocoa did Shock Sesh buy as a larger business?

  Nine tonnes
• What was the total cost for nine tonnes of cocoa for Shock Sesh?

  £18,000
• What was the average unit cost of cocoa when Shock Sesh bought nine tonnes?

  £2,000 per tonne
• How much did the average unit cost decrease for Shock Sesh when buying nine tonnes?

  By £1,000 per tonne
• What does purchasing economies of scale lead to in terms of efficiency?

  Increased efficiency due to reduced inputs
• What additional negotiating powers does a business gain with purchasing economies of scale?

  Better delivery times and longer trade credit
• What are technical economies of scale?

  Cost savings from improved capital and productivity
• How does a growing business acquire better capital?

  By having more financial resources
• What is the effect of increased productivity on average unit costs?

  Average unit costs are likely to fall
• How many chocolates could Shock Sesh mold before acquiring a new machine?

  3,000 chocolates in ten hours
• How many chocolates can Shock Sesh mold after acquiring a new machine?

  9,000 chocolates in ten hours
• What is the relationship between job production and flow production in technical economies of scale?

  Movement from job production to flow production
• What are the key points of purchasing economies of scale?

  • Cost savings from bulk purchasing
  • Better negotiation power with suppliers
  • Reduced average unit costs
  • Increased efficiency and reduced waste
• What are the key points of technical economies of scale?

  • Increased financial resources for better capital
  • Higher productivity from improved machinery
  • Lower average unit costs due to efficiency
  • Transition from job production to flow production