Learning objective
Explain how growth can create unit cost advantages through economies of scale.
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Topic
Expanding a business
Subtopic
Economies and diseconomies of scale
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Quick explanation
Explain how growth can create unit cost advantages through economies of scale
- This point belongs to Expanding a business, especially Economies and diseconomies of scale.
- You need to be able to explain how growth can create unit cost advantages through economies of scale.
- The key ideas to know are economies of scale.
- Use the linked flashcards and practice questions to check recall, then practise applying the idea in an exam-style answer.
Key concepts
Why it matters
This objective helps connect Economies and diseconomies of scale to exam-style questions, flashcards, and revision notes for Expanding a business.
Quick student answer
A small manufacturer produces 200 units of a product at a total cost of £30,000. The fixed cost is £10,000 and the variable cost per unit is £50. If the manufacturer doubles output to 400 units, calculate the new unit cost and explain how this demonstrates economies of scale.
Direct answer
New unit cost = £22.50. The fixed cost (£10,000) is spread over 400 units, reducing the fixed cost per unit from £50 to £25. The variable cost per unit remains £50, so total unit cost falls from £100 to £75, showing a unit cost advantage through economies of scale.
How it works
First calculate the current unit cost: £30,000 ÷ 200 = £150. After doubling output, total cost = £10,000 + (400 × £50) = £30,000. New unit cost = £30,000 ÷ 400 = £75. The fixed cost per unit drops from £50 to £25, while variable cost per unit stays £50. The overall unit cost falls, illustrating how increased production spreads fixed costs and yields a cost advantage.
Key terms
- Economies of scale: A reduction in the per-unit cost of production that occurs when a firm increases its scale of production.
Common trap
Confusing fixed and variable costs: Variable costs per unit remain constant, but total variable cost increases with output. Fixed costs stay constant in the short run, so the unit cost advantage comes from spreading these fixed costs over more units.
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Revision notestopic notes
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Open revision notesRelated learning objectives
- Discuss advantages and disadvantages of business growth methods.
Methods of expansion
- Explain organic growth through franchising, opening new stores and e-commerce expansion.
Methods of expansion
- Explain outsourcing and external growth through mergers and takeovers.
Methods of expansion
- Explain purchasing economies and technical economies of scale.
Economies and diseconomies of scale
- Explain how growth can create diseconomies of scale through communication problems, coordination issues and reduced staff motivation.
Economies and diseconomies of scale