Economies of scale

1. Strategic Cost
Dynamics

2. Strategic Cost Dynamics
Strategic Cost Dynamics covers
three Economics concepts.
 Economies of Scale
 Economies of Scope
 Learning by Doing

3. Economies of Scale

4. Economies of Scale
 Economies of Scale exist when larger-scale
facilities, optimally used, provide lower
average unit cost.
 AC = TC / Q

5. Internal Economies of
Scale
 Internal – advantages that arise as a
result of the growth of the firm.
 Technical Internal =
 Commercial growth of the
 Financial
firm
 Managerial
 Risk Bearing

6. External economies of
scale
 External economies of scale – the advantages
firms can gain as a result of the growth of the
industry – normally associated with a
particular area
External =
 Supply of skilled labour growth of the
 Reputation
Industry
 Local knowledge and skills
 Infrastructure
 Training facilities

7. Economies of Scale -
Internal: Technical
 Larger companies can afford bigger machines –
which may produce more efficiently and do more
tasks
 More machines can mean less staff
 Machines can work 24/7
 The larger the business the greater the number
of tasks that a piece of equipment will have to
do.
 Increased dimensions – bigger containers can
reduce average cost

8. Bulk Buying Economies :
Commercial
 The larger the company the
more it tends to buy in materials
and components.
 The larger the order the better
the discounts and the less
frequent deliveries also reduces
delivery costs.
 Supplier just uses a larger
box/lorry rather than sending in
lots of small packages.

9. Managerial Economies
 The larger the company, the  Use of specialists –
more specialized each accountants, marketing,
manager can become. lawyers, production, human
resources, etc
 In a small business, there is
usually only one manager
who has to do everything.
 In a large business, there is
a larger span of control, with
specialist managers for
each department.

10. Financial Economies of
Scale
 The smaller the business, the
greater the risk for a bank to lend
you money.
 The larger the business, the less of
a risk – due to experience, more
products, greater diversification,
better specialist accounting
managers.
 Large firms able to negotiate
cheaper finance deals

11. Risk Bearing
 Greater Diversification
 Markets across
regions/countries
 Product ranges
 R&D

12. Economies of Scale
The larger the
Unit Cost output the
lower the cost
Scale A per unit!
82p
Scale B
54p
LRAC
MES Output

13. Economy of Scope
 Economy of scope occurs when there
are benefits to combining the
production of two or more products.
If a single firm can jointly produce goods X and Y more
cheaply that any combination of firms could produce them
separately, then the production of X and Y is characterized
by economies of scope

14. Economy of Scope
Economies of scope arise from
“complementarities” in the
production or distribution of
distinct goods or services

15. Real world examples
 Economies of scope between cable TV
and high speed internet service.
 Production of timber and particle board.
 Power generation and distribution.
 Joint cargo and passenger
transportation in airlines reduces
excess capacity.
 Global wholesale distribution of cheese,
salad dressing, and cigarettes.

17. Learning By Doing
 Average costs tend to fall as an organization
gains experience with the manufacture of an
object. The effect is called learning by
doing.
 Learning-by-doing is largely the result of
improvements in methods and processes.

18. Learning By Doing

19. By: Vivek Kumar