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# Economics Unit 3 -Economies of Scale

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### Economics Unit 3 -Economies of Scale

3. 3. Economies of Scale<br />The advantages of large scale production that result in lower unit (average) costs (cost per unit)<br />AC = TC / Q<br />Economies of scale – spreads total costs over a greater range of output<br />6/20/2011<br />Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics <br />
4. 4. Economies of Scale<br />Internal – advantages that arise as a result of the growth of the firm<br />Technical<br />Commercial<br />Financial<br />Managerial<br />Risk Bearing<br />6/20/2011<br />Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics <br />
5. 5. Economies of Scale<br />External economies of scale – the advantages firms can gain as a result of the growth of the industry – normally associated with a particular area<br />Supply of skilled labour<br />Reputation<br />Local knowledge and skills<br />Infrastructure<br />Training facilities<br />6/20/2011<br />Addu High School, S.Hithadhoo . Dept. of Business Studies A’ level. 2011/ Grade12 Economics <br />
6. 6. Economies of Scale<br /><ul><li>Assume each unit of capital = £5, Land = £8 and Labour = £2
7. 7. Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility
9. 9. Economies of Scale<br /><ul><li>Doubling the scale of production (a rise of 100%) has led to an increase in output of 200% - therefore cost of production
10. 10. PER UNIT has fallen
11. 11. Don’t get confused between Total Cost and Average Cost
12. 12. Overall ‘costs’ will rise but unit costscan fall