Internal Economies of Scale Essay

736 Words May 2nd, 2015 3 Pages
Internal economies of scale

As a business moves to a larger scale of operations in the long run, it may experience falling average costs. If the unit cost falls as the scale of operations increases, the business is said to be benefiting from internal economies of scale

Technical economies of scale: A business may invest in capital equipment, such as a production line. If this equipment is used only on a small scale, this will be expensive (for example, the high costs of the production line may be spread only over a few hundred units of production). If production occurs on a larger scale, the cost per unit is likely to be lower because the costs of the investment are spread over more units. Some technology designed for large-scale
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Managerial economies of scale: these occur as businesses grows, allowing it to use specialist managers. For example, larger organizations are more likely to be able to afford and justify specialist human resource managers (HR). This may help to ensure that people are managed effectively, are motivated, and are used efficiently. Other areas in which specialists may be used might include finance, commercial law, and marketing. Entrepreneurs often try to manage all areas of the business themselves and are unlikely to be experts in all these different fields. The employment of specialist can lead to better decisions and fewer mistakes being made. Managerial economies can also occur because the growth in the number of managers will not be as fast as the growth of the business as a whole. If a manager oversees four people, it is probably possible for the business to grow so that he/she is looking after seven or eight people without requiring an additional manager. This means that his/her salary costs can be spread over more people as the business grows.

Financial economies of scale: these occur if larger businesses are able to raise finance more cheaply than smaller businesses. Larger businesses are likely to have more assets to use as collateral than small firms, and this might mean that a bank believes that they are lower risk and therefore can be given lower rates of interest. The credit rating of a

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