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Large Firms Gain a Large Advantage Because of Economies of Scale

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Introduction

Large Firms Gain a Large Advantage Because of Economies of Scale Large firms gain many advantages over small firms for many different reasons. Firstly, there is bulk buying. Because they have a large capital and cash flow, they can afford to spend more money on things. As they can spend more money, they can buy more of one type of good. Since goods are packaged, shipped and processed, money is used for every group of products. When these products are bought in large groups then the cost goes down because the distribution and production costs are spread across many goods. This is known as 'bulk buying'. Managerial economies of scale are where there are more managers in a company. As well as having large amounts of money, large companies also employ large amounts of people. ...read more.

Middle

These specially trained people will be faster, more accurate, more skilled and able to produce far faster than untrained people. Large firms have lots of money. They have access to public money in the form of shares and they can borrow more money than small firms can from banks. This advantage is partly due to the fact that they have huge sums of money in the first place and also due to the fact that other businesses and people will trust them to be more stable and secure. As more money is borrowed from the banks, the interest rates go down. This in itself is due to a form of buying economies or scale. Risk bearing economies of scale help large firms in two main ways. Firstly, as the company is very big, it can produce many products. ...read more.

Conclusion

Technical economies of scale are all to do with maximising efficiency. Where many resources are needed to produce a product, a small firm will only use these resources to the level of the lowest resource. Large firms, having more money, are able to buy more of the lowest resource, or use it more efficiently. For example, if a small firm produces cars and at the end of the production process one person has to check each car for five hours then only one car can be produced every five hours. Large firms have the advantage that they can afford more production and labour. They may employ five people to check the cars, so the bottleneck is eliminated and a car can be produced every hour. In conclusion, large firms have many different types of economies of scale. These enable the companies to produce more goods for lower prices. It also enables them to have less risk and better working conditions. All these factors maximise efficiency and the companies profits. David Hulbert ...read more.

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