Operational Strategies - Scale & Resource Mix

How do companies choose the right ‘scale’ of production?

Economies of scale

By the end of this lesson you should be able to…

Describe what is meant by economies of scale

Explain 3 different examples of economies of scale

Discuss why companies can also experience diseconomies of scale

How to do calculate an average?

1 352 503 254 05 356 547 80

Batting average

1 32 13 04 35 26 27 2Goals scored

1 25

2 15

3 20

4 22

5 20

6 15

7 20Cost of a haircut

in Dorking

If the next number is higher / lower what will

it do to the average?

1. Economies of scale

Arise when unit costs fall as output

increases

Economies of scale

By the end of this lesson you should be able to…

Describe what is meant by economies of scale

Explain 3 different examples of economies of scale

Discuss why companies can also experience diseconomies of scale

Unit costs formula - reminder

Average cost per unit is calculated using this formula:

Total production costs in period (£)

Total output in period (units)

Economies of scale illustratedAverageCost perUnit (£)

Quantity of output

CostCurve

AC1

AC2

Q1 Q2

Unit costs are falling as output increases from Q1 to Q2

= economies of scale

Unit costs start to rise as output rises above Q3

= diseconomies of scale

Q3

Diseconomies of Scale

LACCosts

Output

Economies of Scale Diseconomies of Scale

Minimum efficient scale

The level of output at which average

cost stops falling as output increases

Minimum efficient scale

The output at which average unit costs of

production are at their minimum

Internal v External Economies of Scale

Arise from the increased output of the business itself

Internal

Occur within an industry: all competitors

benefit

External

Examples of Internal economies of scale

Buying economies

Buying in greater quantities usually results in a lower price (bulk-buying)

Technical Use of specialist equipment or processes to boost productivity

Marketing Spreading a fixed marketing spend over a larger range of products, markets and customers

Network Adding extra customers or users to a network that is already established (e.g. mobile phones)

Financial Larger firms benefit from access to more and cheaper finance

External economies of scale Arise from the industry as a whole – i.e. all

competitors benefit

Often associated with particular geographic areas E.g. Creative & media in London

Examples Having many specialist suppliers close by Access to research and development facilities Pool of skilled labour to choose from

Diseconomies of scale

Factors which cause the average production cost per unit of a

business to increase above the efficient level

Economies of scale

For your exam the board want you to focus on

It is still worth knowing about others to build out your answers and display your wider knowledge!

Purchasing SpecialisationTechnical

Examples of diseconomies of scale

Poor communication More difficult to control a larger, more

complex business More frequent machinery & employee

breakdown if output & capacity utilisation is too high

Loss of management focus

What about this for scale!

Oasis of the seas

What advantages does the stunning scale of the ship offer customers and the operator Royal Caribbean?

Are there potential diseconomies of scale?

Quick revision test – 10 mins

It’s the last 10 mins of the exam There are two questions left One of them is on economies of scale You have the potential to shift up a grade by

just picking up 10 marks