Economies of Scale | Business Studies for GCSE/IGCSE - Year 11 PDF Download

Economies of Scale

• Definition: Economies of scale refer to the cost advantages that a business can achieve as it increases its scale of production. This results in efficiencies that lower the average costs of production.
  • Explanation: When a business grows and expands its operations, it can benefit from economies of scale. This means that the cost per unit of production decreases as the volume of output increases.
  • Example: For instance, a company that produces smartphones might experience economies of scale when it increases its production capacity. This could lead to lower costs per phone due to efficiencies in the production process.
• Impact on Large Firms: Economies of scale are particularly advantageous for large firms, as they can reduce their costs of production to levels that smaller firms may not be able to achieve.
• Differentiation from Total Costs: It's important to note that while economies of scale can lead to lower average or unit costs, the total costs incurred by the business may still increase. However, this increase occurs at a decreasing rate per unit produced.

Diagram Economies of Scale

Diagram Analysis

• Initially, when the output is low, the average costs for the firm are relatively high.
• As the firm boosts its production, it starts benefiting from economies of scale, resulting in a reduction in the average cost per unit.
• There comes a point where the business achieves the optimal output level, minimizing costs.
• After this point, diseconomies of scale set in, causing the average cost to rise once again.

Different Types of Economies of Scale

• Internal factors contribute to the creation of economies of scale, over which businesses have varying degrees of control.
• Businesses strive to capitalize on these economies to reduce costs and boost profits wherever feasible.

Explanation of the Different Economies of Scale