Purchasing economies- They are given discounts for buying in bulk, which reduces their costs
Managerial economies -They can employ specialists, such as accountants and lawyers which can improve efficiency
Financial economies- They can borrow money cheaper i.e. they pay less interest on borrowed money
Marketing economies -They can reduce their promotional costs
Risk-bearing economies- They can produce a range of goods/services. So, if one fails another will succeed
Technical economies- They can afford superior machinery e.g. computers, robots etc.
There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as diseconomies of scale.
Types of costs
Fixed costs are expenses that do not change with the level of output. Large firms have lower unit costs than small firms because these fixed costs are spread more thinly over higher sales volumes. For instance, take a £1 million advertising campaign. If just two items are sold the unit cost of promotion is half a million pounds. If a million items are sold the unit cost falls to just one pound. Many economies of scale are about spreading fixed costs more thinly.
Economies of scale means large organisations can often produce items at a lower unit cost than their smaller rivals - a source of competitive advantage.
It is important not to confuse total cost with average cost. As a firm grows in size its total costs rise because it is necessary to use more resources. However, the benefits of becoming…