Economies of Scale
Economies of Scale These occur when mass producing a good results in lower average cost. Economies of scale occur within an firm (internal) or within an industry (external). Internal Economies of Scale These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of: * Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively. * Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc. * Financial economies made by borrowing money at lower rates of interest than smaller firms. * Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output. * Commercial economies made when buying supplies in bulk and therefore gaining a larger discount. * Research and development economies made when developing new and better products. External Economies of Scale These are economies made outside the firm as a result of its location and occur when: * A local skilled labour force is available. * Specialist local back-up forms can supply parts or services. * An area has a good transport network. * An area has an excellent reputation for producing a
