3 production_economies_of_scale

3 production_economies_of_scale - tutor2u GCSE Business...

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tutor2u GCSE Business Studies Economies of scale Introduction Economies of scale arise when the cost per unit falls as output increases . Economies of scale are the main advantage of increasing the scale of production and becoming ‘big’. Why are economies of scale important? - Firstly, because a large business can pass on lower costs to customers through lower prices and increase its share of a market. This poses a threat to smaller businesses that can be “undercut” by the competition - Secondly, a business could choose to maintain its current price for its product and accept higher profit margins. For example, a furniture-maker which could produce 1,000 cabinets at £250 each might expand and be able to produce 2,000 cabinets at £200 each. The total production cost will have risen to £400,000 from £250,000, but the cost per unit has fallen from £250 to £200. Assuming the business sells the cabinets for £350 each, the profit margin per cabinet rises from £100 to £150. There are two main types of economies of scale: internal and external . Internal economies of scale have a greater potential impact on the costs and profitability of a business. Internal Economies of Scale
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This note was uploaded on 05/20/2010 for the course BUSINESS 6 Producti taught by Professor N/a during the Spring '10 term at Open Uni..

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3 production_economies_of_scale - tutor2u GCSE Business...

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