Economies of scale is a term that refers to the reduction of per-unit costs of production or manufacture through an increase in production volume. This concept is also referred to as diminishing marginal cost.
Some examples of economies of scale are as below: (Source: Economics Help)
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 – e.g. developing new drugs
To develop new drugs to treat illness takes considerable degrees of investment and research with no guarantee of success. Therefore this can only be undertaken by pharmaceutical companies with significant resources.
Container Principle – more efficient transport and packaging.
If the surface area of a container increases by 100%, the volume it can carry will increase by 200%. Therefore, transporting larger quantities leads to lower average costs.
Some examples of economies of scale are as below: (Source: Economics Help)
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 – e.g. developing new drugs
To develop new drugs to treat illness takes considerable degrees of investment and research with no guarantee of success. Therefore this can only be undertaken by pharmaceutical companies with significant resources.
Container Principle – more efficient transport and packaging.
If the surface area of a container increases by 100%, the volume it can carry will increase by 200%. Therefore, transporting larger quantities leads to lower average costs.
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