AS Economics and Business - PowerPoint Presentation

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AS Economics and BusinessEconomies and Diseconomies of ScaleUnit 2b

By Mrs Hilton

for

revisionstationSlide2
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Lesson ObjectivesTo be able to discuss economies and diseconomies of scale

To be able to discuss average costs

To be able to discuss minimum efficient scaleSlide4

StarterDid you ever buy lots of something because it was cheaper in bulk?Slide5

Economies of ScaleThe idea that as a business grows in size it will be able to gain competitive advantage in a number of ways:

By having more funds to buy stock, so being able to get better deals by buying in bulk

By having more power

By having more funds to pay for specialist staff

By having a better reputation so banks are more willing to lend

We call this economies of scaleSlide6

Give me the theory then..Economies of scale (can we say EOS for short) occur when

unit costs or average costs

fall

as a result as an

increase in the level of output

of the business.

The more they make the cheaper it gets per item.

ANY Eos question should be about how

getting bigger

means a firm can

lower its average costs

. They are like shoes – you need both to be comfortable.

Bigger

Means

Lower

Average costsSlide7

VideoSlide8

Why is EOS a good thing then?Can lead to:Higher profit margins (as it costs less per item to make your product, you will have more profit in your pocket).More funds for investment or even for giving shareholders higher dividends – means it will be easier to attract investment in the futureSlide9

EOS categoriesSlide10

Bulk-buying / purchasing economies

As businesses grow they

need

to order larger quantities of production inputs.

As the order value increases, a business obtains more bargaining power with suppliers.

It may be able to obtain discounts and lower prices for the raw materials.Slide11

Technical economies of scale

Businesses with large-scale production can use more advanced machinery (or use existing machinery more efficiently).

This may include using mass production techniques, which are a more efficient form of production. Fixed costs of purchasing machinery spread over higher levels of output.

A larger firm can also afford to invest more in research and development.Slide12

Specialisation / managerial

Greater potential for managers to specialise in particular tasks

E.g. Employing a full time accountant

In small firms the owners have to make lots of decisions, some he/she have little knowledge of.

And so quality of decision making could be better in a larger firm.Slide13

Financial economies of scale

Small businesses find it hard to obtain finance or the cost of the finance is often quite high.

Small businesses are perceived as being riskier than larger businesses that have developed a good track record.

Larger firms therefore find it easier to find potential lenders and to raise money at lower interest rates.Slide14

Marketing economies of scale

Every part of marketing has a cost.

As a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit.Slide15

Risk bearing

Bigger companies can spread their risk by investing in more products and more markets

This is called diversificationSlide16

Overview

Type of Economies of Scale

Explanation

Financial Economies of Scale

Large firms can benefit from cheaper loans and wider sources of cheap finance (investment from shareholders)

Marketing Economies of Scale

The advantages that large firms get in relation to buying and selling. Large firms can attract specialist buyers who don’t waste money buying stock that will not sell. They also have specialist sellers/marketing staff who ensure that goods will sell. Big firms benefit significantly from being able to “buy in bulk”

Technical Economies of Scale

These are the advantages that large firms have when it comes to the production process. Large firms can employ specialist labour and capital which stimulates productivity and reduces average costs

Managerial Economies of Scale

Large firms have the money/resources to attract the most productive/efficient/specialist managers who make the most effective business decisions and increase efficiency over time

Risk- Bearing Economies of Scale

Large firms benefit from having wider, more diversified product range. This means that they are better able to withstand the risk of a fall in demand for one good or serviceSlide17

Diseconomies of scale (DEOS)Slide18

Video 2Slide19

Give me more theory thenAs the level of output of a firm increases the costs increase (DEOS) or oh no a graph

This is an average cost curve. You don’t have to draw it but it may help you understand DEOSSlide20

Categories of DEOSSlide21

Lack of motivation

Workers in large companies may feel

demotivated

– with little say in their working life

This can lead to powerlessness and alienation

Means increased absenteeism and lateness

Reduction in productivity

Lower output per worker

Means increased unit costsSlide22

Lack of communication

As the size of the workforce increases there will be less face-to-face communication

Takes a long time for messages to get through as there are many layers of management

Less effective communication

Means mistakes made

Means more wastage

Therefore higher average unit costsSlide23

Lack of co-ordination

As a company grows and takes on new staff, makes new products buys new premises all of this needs to be coordinated

All resources need to be controlled so that operations can run smoothly

Workers may need monitoring which can add to costs

May need more managers which increases average cost per unitSlide24

Minimum efficient scaleThis is the most efficient point of production

Bottom of the average cost curveSlide25

Sample question 1The ability of a business such as housebuilder

Barratt Homes to use its larger size to negotiate better terms with its suppliers of raw materials is an example of

A diseconomies of scale.

B technical economies of scale.

C marketing economies of scale.

D purchasing economies of scale.Slide26

Answer question 1 Answer D Purchasing economies of scale

• Economies of scale occur when the average cost per unit falls as output increases (1 mark)

• Purchasing economies occur when businesses are buying large enough quantities to be charged a lower price per unit (1 mark) either because unit supplier costs are reduced (1 mark) or because the buyer has market power/

monopsony

power (1 mark).e.g. cheaper bricks for Barratt Homes (1 mark).

• Marketing economies are when larger firms can advertise using national media and therefore spread the fixed costs across more units so reducing average cost. (1 mark).

• Technical economies arise when larger and more efficient capital items can be used because their high costs can be spread across a larger quantity of output (1 mark).

• Diseconomies of scale are increases in unit cost that occur as a business grows larger, often associated with communication issues (1 mark)