economics

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economics

  1. 1. Economies and Diseconomies of Scale
  2. 2. Economies of Scale <ul><li>As businesses grow – costs of production decrease </li></ul><ul><li>Bigger businesses gain some advantages over smaller businesses through Economies of Scale </li></ul><ul><li>There are two types of Economies of Scale: </li></ul><ul><ul><li>Internal Economies </li></ul></ul><ul><ul><li>External Economies </li></ul></ul>
  3. 3. Internal and External Economies <ul><li>Internal Economies </li></ul><ul><li>Those Specifically related to the business itself eg:- </li></ul><ul><li>Production </li></ul><ul><li>Purchasing </li></ul><ul><li>Marketing </li></ul><ul><li>Financial </li></ul><ul><li>Managerial </li></ul><ul><li>External Economies </li></ul><ul><li>Benefits the whole industry and not specific firms </li></ul><ul><li>Skilled labour in the area </li></ul><ul><li>Better road and rail networks </li></ul><ul><li>Improves the reputation of the area </li></ul><ul><li>Attracts other businesses </li></ul><ul><li>Raw Material Supply, by products, waste materials </li></ul>
  4. 4. Sources of Economies <ul><li>Division of Labor </li></ul><ul><li>Technical Economies </li></ul><ul><li>Inventories </li></ul><ul><li>Specialization </li></ul><ul><li>Cumulative Volume Economies </li></ul><ul><li>Specialized Equipment </li></ul><ul><li>Indivisibility </li></ul><ul><li>Large Machines Integrative Processes </li></ul><ul><li>Increased Dimensions </li></ul><ul><li>Set Up costs </li></ul><ul><li>Overheads </li></ul>
  5. 5. Sources of Economies <ul><li>Marketing Economies </li></ul><ul><li>Managerial </li></ul><ul><li>Financial </li></ul><ul><li>Advertising Expenditure </li></ul><ul><li>R&D for New Product Development </li></ul><ul><li>Specialization </li></ul>
  6. 6. Example: <ul><li>Daimler Chrysler own the following brands: </li></ul>Purchasing economies of scale can be achieved by bulk buying parts that can be used across all brands such as Wiper Blades
  7. 7. Diseconomies of Scale <ul><li>There are limits to the amount a business can grow </li></ul><ul><li>If businesses grow to large they start to suffer from Diseconomies of Scale </li></ul><ul><li>These diseconomies happen because the larger the business the more difficult it becomes to manage </li></ul>
  8. 9. Some common diseconomies of scale: <ul><li>Decision making </li></ul><ul><li>Managerial problems </li></ul><ul><li>Communication problems </li></ul><ul><li>Co-ordination/control problems </li></ul><ul><li>Staffing problems </li></ul>
  9. 12. Task: <ul><li>Peter, a sole trader who owns a grocery shop, is in trouble because of a supermarket which has just opened. The supermarket benefits from economies of scale. Select and explain (in detail) how four of these economies will benefit the supermarket. </li></ul><ul><li>Explain how Diseconomies of Scale could effect the Virgin Group? </li></ul>

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