Why superstores can offer cheaper prices

Goods in superstores are cheaper than small town centre shops as they can buy in bulk. This is what is known as economies of scaleeconomies of scale: Economy of scale means that big companies can produce things cheaper than smaller companies. There are two reasons for this. First, they can buy in bulk, so can negotiate with suppliers to pay less. Second, the more a company produces the lower the average cost per product will be of overheads (fixed costs, such as buildings). Where similar companies locate together as an industry they can also experience economies of scale. They share the costs of building the necessary infrastructure (eg roads, telecommunications) and the cost of educating the workforce, between them. Also the combined demand from all these companies should mean that supplies are cheaper., eg a pack of six tins of beans is cheaper than six individual ones. If one superstore orders a million tins of beans while another orders ten thousand, the superstore that orders the larger amount will buy the beans at a cheaper cost per tin. The saving is then passed on to the customers.

If a superstore is built where other stores are located it will gain external economies of scale [External economies of scale: Costs are reduced when businesses are concentrated in one area eg Transport costs may be reduced. These may mean products can be made more cheaply. ]. Money will be saved because roads to reach the site and car parks have already been built.