Economies of Scale - Production Analysis, Business Economics & Finance Video Lecture | Business Economics & Finance - B Com

what are economies of scale this
mini-lesson briefly explains and looks
at some of their advantages economies of
scale is a term used to describe certain
benefit benefits that business gains
from increasing levels of production
these include what are known as
technical specialization and purchasing
economies the idea of economies of scale
is about more than the simple idea that
higher sales leads to higher profits
it's about changing the level of output
so that certain cost savings or
economies can be made take an extreme
example supposing that you decide to set
up your own company producing smart
phones in your garage would you be able
to compete with the existing
manufacturers such as Apple and Samsung
could you make a profit from selling
your phones at the same price as those
made by these giant companies you'd
almost certainly find that the unit cost
of production marketing budget and
expertise of Apple and Samsung would
make it very difficult to get consumers
interested in buying your products let's
quickly look at what we mean by
technical specialization and purchasing
economies of scale first of all
technical economies larger firms can
make savings through investing in bigger
and more cost-effective machinery and
equipment for example sophisticated IT
systems to collect and process data can
be a way to improve efficiency however
this technology is probably only
affordable to businesses operating on a
certain scale mass production techniques
involving high levels of automation can
improve labor productivity for example
the use of robots in manufacturing once
again though only businesses that
reached a certain size will be able to
justify purchasing this type of
expensive machinery better and bigger
transport methods can reduce
distribution costs per unit so a larger
business with bigger sales might make
deliveries with a lorry instead of a van
this
would produce cost savings it will
reduce the number of trips needed and
the amount of labor needed to deliver
goods specialization economies as a firm
becomes larger it's more able to obtain
the advantage of division of labor this
means that a worker concentrate on one
kind of job instead of having to do a
range of quite different jobs this
allows the worker to become more skilled
and quicker at that specific task this
in turn will reduce labour cost per unit
produced for example consider Joe a
small independent retailer who owns one
shop as well as dealing with customers
Joe spends time on a wide range of other
tasks
these include negotiating with suppliers
arranging delivery promoting the
business and keeping financial records
if the business could grow an operate
say four or five shops then Joe might be
able to justify employing an Accounts
Clark this is something that the profits
from one shop probably could not support
but the clerk could maintain financial
records arrange for the payment of
suppliers and staff and so on an
accounts clerk will be more efficient
than Joe when it comes to doing this
work this is because she does it all the
time whereas the small-scale
entrepreneur like Joe only does it some
of the time a clerk also has a more
detailed understanding of how to set up
the right kind of financial records the
same principles apply to employing other
specialists such as marketing managers
and production engineers purchasing
economies large firms can buy raw
materials and other inputs in greater
bulk suppliers will be keen to offer
price discounts to those businesses that
they see is big customers not only that
the managers of a business that has been
around for a time will manage costs
better the managers have learnt from
experience what are the advantages of
economies of scale
firstly lower unit costs achieving
economist this girl is important because
this enables a business to produce its
unit costs this gives the business two
options it can offer customer to reduce
price or it could keep prices the same
and accept a better profit margin
secondly barriers to entry
what are barriers to entry very large
businesses are able to deter other
businesses from entering the market in
the short run as discussed earlier it's
difficult for start-up to directly
compete in mass markets with businesses
such as Kellogg's breakfast cereals
Microsoft's computer operating systems
and Johnson & Johnson pharmaceuticals
because of their sheer scale for
instance were threats to the dominance
of large companies like this emerge a
price war may break out a large company
is more likely to win a price war than a
small business with much less capital
and much higher unit costs so to sum up
economies of scale are the cost
advantages that businesses obtain as
they increase their size examples of
economies of scale include technical
specialization and purchasing the
advantages of economies of scale include
lower unit costs and barriers to entry
you might like to try this question a
limited manufacturer's dry dog food the
business has grown rapidly and the
directors are now seeking to build a nut
a new much bigger factory briefly
explain how a limited might obtain
purchasing technical and specialization
economies of scale to find out more
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