• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain the different types of economies of scale - Discuss which economies are likely to occur as a result of a) horizontal integration b) vertical integration.

Extracts from this document...


, Explain the different types of economies of scale. Discuss which economies are likely to occur as a result of a) horizontal integration b) vertical integration. Economies of scale are said to exist when in the long run (all factors of production are variable) costs fall as output increases. This is due to firms expanding in size and output, which causes the long run average costs to fall. These economies of scale are experienced as the business expands until a point is reached where average costs are constant as output increases. After this point if the business expands anymore, it is likely to experience diseconomies if scale and decreasing returns to scale will set in. Therefore the long run average cost curve is U-shaped. Economies of scale are reached through a variety of ways. Different sources of economies of scale are technical economies, managerial economies, purchasing & marketing economies and financial economies. ...read more.


Marketing is also less expensive if there are a larger number of products being advertised, and so larger firms can enjoy lower average costs due t economies of scale. The forth source of economies of scale is financial economies. Small firms find it expensive to raise new investment funds and loans are also given at relatively high interest rates as it is seen as a bigger risk to the bank to loan money to a small firm with little or no collateral which could easily go bankrupt, than it would be to loan money to a large firm. Therefore large firms often have low interest rates on bank loans, and also are able to raise money from sales of shares, and so achieve lower average costs. Many firms choose to merge rather than grow internally as it is often cheaper to do so and easier and quicker to become much larger and experience lower average costs through economies of scale. ...read more.


Vertical mergers/integration occurs when two firms at different production stages of the same industry merge to form one large company. There are two types of vertical integration, forward and backward. Forward integration involves a supplier of one product merging with one of its buyers, i.e. a car manufacturer buying a dealership. Whereas backward integration involves the company buying one of its suppliers, i.e. a car manufacturer buying a tyre company. Vertical integration is less likely to result in economies of scale than horizontal integration. This is because there are unlikely to be any technical economies between the two firms. However there may be some marketing economies as only one marketing department would be required thus lowering costs in that aspect of the firm. However it is more likely with vertical integration, that there will be financial economies. This is due to the fact that the company would have grown significantly and would therefore have much more collateral and become a lower risk to banks lending them money, so a lower interest rate will be achieved, causing average costs to fall due to economies of scale. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Peer reviewed

    The impact of economies and diseconomies of scale Tesco face

    4 star(s)

    This means Tesco benefits in its buying costs by using more than one supplier. Another way is the improvement of financial services. As firms give companies such as Tesco credit on the products they purchase, they can improve their cash-flow and can benefit by earning interest on the money they have in the bank.

  2. Economics questions - economies of scale.

    Since the larger advantage of division of labour is the increase in output, the large firm's rise in total output is greater than its rise in total cost from employing the specialists. So the average cost falls. 2. Define and explain all Internal Diseconomies of Scale: * Internal Diseconomies of

  1. Features of command economies

    The consumption is determined by consumers. So there are initiatives of investment in every company. Companies compete with each other and the technical is progressed. There are initiatives of investment in every company. People work harder than before since the competition also happens between them.

  2. Economics of European Integration

    to execute the deregulation. A unique and, from a deregulatory point of view, interesting feature of the electricity sector is its horizontal separation in power generation as well as the very difficult storage of the electricity as a product. Deregulation policies need to consider the common features of network industries and distinguish them from the industry-specific characteristics.

  1. How is it possible that a tiny, carbon based stone could effect the lives ...

    "It is not known when hostilities will cease, if at all. Angola produced just over five million carats in 1998, at an average price of $US 136/ carat." (MBendi) "As a result of UNITA's incursion into the diamond market, the Angolan government's diamond sector, the Endiama Corporation, loses profits and is forced to tackle problems of mining property.

  2. Local, national and European economies impact on two contrasting organisations within the UK, Vauxhall ...

    area where he was living, he decided to take action by purchasing the outlet he drank in, which he named Wetherspoons. His first pub offered a good range of cask-conditioned beers in a music-free environment. Twenty years on, the range of beers and the absence of any music, form the

  1. Transition Economies

    The International Demonstration Effect gradually revealed to eastern citizens, despite efforts at censorship, that living standards were better in the west. Eastern European countries after realizing conditions were far better in the west than in the east they decided to transform their economies similar to ones in the West.

  2. Sports manufacturers

    The hype of Nike advertising brings with it the opportunity to reach the public through the promotion of Nike's newest advertising endeavor. Expansion into Outdoors Clothing: The expansion into outdoor clothing is an opportunity for Nike because this will allow Nike to become more of a part of the apparel market.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work