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Business Studies

Economies of scale

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There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as disecomonies of scale.

The benefits of large-scale business

Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:

  • Purchasing economies when large businesses often receive a discount because they are buying in bulk.
  • Marketing economies from spreading the fixed cost of promotion over a larger level of output.
  • Administrative economies from spreading the fixed cost of management staff and IT systems over a larger level of output.
  • Research and development economies from spreading the fixed costs of developing new or improved products over a larger level of output.

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