Economies of Scale
Business: Cambridge International GCSE (2027 Exams), topic 4.2.3
Economies of Scale
Economies of scale describes companies benefiting from a reduction (fall) in the average unit cost of their product or service because of increasing production (the number of units produced). A lower average cost per unit can let a business make higher profits or charge a lower price. Economies of scale can come from:
Purchasing economies of scale
- This is when larger companies get discounts from their suppliers because they are buying lots of units in bulk.
- In the same way, the average price of a can of Coca-Cola is lower if you buy a 6-pack instead of a single can.
- Businesses usually get a lower (cheaper) average cost if they are buying more products and buying things like raw materials in bulk.
Technical economies of scale
- This happens because larger companies are able to invest in expensive, specialist machinery and equipment.
- For example, Tesco can afford to invest in expensive technology that maximises the efficiency of their stock (in warehouses etc).
- But a local corner shop may not be able to afford the technology or system. For the corner shop, the costs outweigh the benefits of the technology.
Managerial economies of scale
- Large businesses can employ specialist managers (e.g. finance, marketing, HR) to improve efficiency.
- Example: Amazon uses expert logistics managers to run its warehouses, cutting costs per unit.
Financial economies of scale
- Bigger firms usually find it easier and cheaper to borrow money, because banks see them as less risky.
- Example: A large supermarket chain can secure lower interest rates on loans compared to a small independent shop.
Marketing economies of scale
- Larger firms can spread the cost of advertising across millions of products.
- Example: Coca-Cola runs one global advertising campaign, but the cost per can sold is tiny.
Test yourself on Economies of Scale
What are the 2 main types of economies of scale?
"This is when larger companies get discounts from their suppliers because they are buying lots of units in bulk." Which type of economies of scale is this?