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3 3 3 economies of scale

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Economies & Diseconomies of Scale Internal Economies of Scale • Definition: When the average costs of a business decrease as the output of an individual firm increases in the long run. • There are a 6 main economies of scale 1. Managerial Economies of Scale • Larger firms can afford more specialized managers E.g. HR manager, production manager. This leads to greater efficiency in that department and therefore lower average costs. Purchasing Economies of Scale • The larger the firm the more likely it is able for them to buy their raw materials in bulk. When a business buys in bulk they are usually able to negotiate lower prices and discounts which leads to lower average costs. 3. Financial Economies of Scale • Larger firms have access to wider ranges of sources of finance as they are less risky compared to smaller firms. They can negotiate lower interest rates and sells shares on the stock market instead of borrowing money- Both resulting in lower costs. 4. Marketing Economies of Scale • As a firm grows bigger, the cost of advertising is spread out over a larger number of potential customers and products and therefore reducing average costs. • E.g. If Mars advertise their brand it will cover advertising for Mars Chocolate bar and Mars Ice cream. 5. Technical Economies of Scale These refer to gains in productivity/efficiency from scaling up production. 1. Large-scale businesses can afford to invest in specialist capital machinery. For example, a supe ...
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