Readers Question: How The Economies Of Scale Can Bring Benefits To The Market.
Economies of scale occur when increased output leads to lower unit costs (lower average costs)
Diagram Economies of Scale
Examples of Economies of Scale include
Tap Water – High Fixed Costs of a national network.
To produce tap water, the water companies had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, since they distribute water to over 25 million households it brings the average cost down. However, would it be worth another water company building another network of water pipes to compete with the existing company? No, because if they only got a small share of the market, the average cost would be very high and they would go out of business. This is an example of a natural monopoly – most efficient number of firms is one.
Specialisation – Car Production
Another economy of scale is in the production of a complex item such as a motor car. The production process involves many different complex stages. Therefore to produce a car you should split up the process and have workers specialise in producing a certain part. e.g. a worker may become highly specialised in the design of a car; another in testing e.t.c. Specialisation requires less training of workers and a more efficient production process. However, if you have several distinct production processes it is most efficient to have a large output.
Bulk Buying – Supermarkets
Supermarkets can benefit from economies of scale because they can buy food in bulk and get lower average costs. If you had a delivery of just 100 cartons of milk the average cost is quite high. The marginal cost of delivering 10,000 cartons is quite low. You still need to pay only one driver, the fuel costs will be similar. True, you may need a bigger van, but the average cost of transporting 10,000 is going to be a lot less than transporting 100.
Marketing economies
If you spend £100 on a national tv advertising campaign it is only worthwhile if you are a big national company like Starbucks or Coca Cola. If your output is small, the average cost of the advertising is much higher.
Risk Bearing – developing new drugs
3 comments ↓
Definition: Economics of Scale is a term that is used to describe the reduction in cost-per-unit as more units are produced. For example, if a company makes 500 widgets, they cost the company 10 cents a piece to produce. Another company makes 100,000 widgets, and can therefore purchase the materials necessary to make them for much cheaper than its competitors, so each widget only costs this company 5 cents a piece to produce.
Economies of scale apply to production of goods and perhaps services where there are direct costs which are spread as volume of output rises.
Risk management is not like this. Statistically an unlikely event may encourage more and larger investments in the opportunity, but this is not an economy of scale and the one in ten billion event will be catastrophic to all the investors.
Protection against a once in a lifetime event would require actions and costs that would reduce the benefit to mundane levels but would require absurd levels of monitoring, surely this is not an economy of scale?
are the cost advantages that the business obtain due to expansion, the nation of increasing efficiencies of the production of good as the number of goods
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