Learning objective
Explain purchasing economies and technical economies of scale.
Read the explanation, check the common trap, then practise with flashcards and questions.
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Topic
Expanding a business
Subtopic
Economies and diseconomies of scale
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Quick explanation
Explain purchasing economies and technical economies of scale
- This point belongs to Expanding a business, especially Economies and diseconomies of scale.
- You need to be able to explain purchasing economies and technical economies of scale.
- The key ideas to know are technical economies, purchasing economies, and 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
Explain how technical economies of scale can affect the cost structure of a small manufacturer.
Direct answer
Technical economies of scale occur when a firm expands production, allowing it to spread fixed costs over a larger output, use more efficient machinery, and achieve higher productivity, thereby reducing average total cost.
How it works
By increasing output, fixed costs such as machinery depreciation and plant overheads are divided by more units, lowering the cost per unit. Larger production runs also justify investment in specialised equipment that improves efficiency, further reducing variable costs per unit.
Key terms
- Economies of scale: Economies of scale refer to the cost advantages that a business obtains due to expansion, where the average cost per unit of output decreases as the scale of production increases.
Common trap
Mixing up purchasing economies with economies of scale: Purchasing economies only reduce the cost of inputs; the overall unit cost depends on how those inputs are used and whether the firm can spread fixed costs over more units.
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Revision notestopic notes
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Open revision notesRelated learning objectives
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- Explain how growth can create unit cost advantages through 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