Economies Of Scale Essay

Submitted By Jordan_Binless
Words: 1376
Pages: 6
Open Document
Economies of scale

What are economies of scale?
Economies of scale are basically anything that makes a company more efficient. Whether that be costly efficient to save the company money, time efficient to save time or productively efficient to produce more of the products so that the company can sell more. All of these come together to make the company more efficient and eventually save them a lot of money.
”In microeconomics, economies of scale are the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. More simply put, when more goods can be produced on a larger scale with lower costs, economies of scale is said to be achieved. The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale is the opposite.”
Source achieved from: http://en.wikipedia.org/wiki/Economies_of_scale When more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized.

Source achieved from: http://www.investopedia.com/articles/03/012703.asp#axzz2EGWNIOG2 Tesco economies of scale
Why is it important for Tesco?
Economies of scale are very important to Tesco because with the updates that they can make to their company, they will be able to save millions of pounds. If the business is running inefficiently then they will not receive as much profit.
Buying in bulk domestically
To save them money, Tesco buy fresh products like fruit and bread from the UK. Tesco can get these products cheaper if they buy the product in bulk because if they offer the other company a price for them buying 1000 of the product. This price will be cheaper than normal but the other company will not reject Tesco’s money for two reasons; firstly because having your product in Tesco will increase market share because more people will see the product on the shelves. Secondly, If it is cheaper the company will lose money but not profit. If the profit margin is smaller they will make less but still make money. Times that by 1000 for the items Tesco buy and the company makes a lot of money. The fact that Tesco can buy in bulk makes them more efficient because they do not have to spend as much money on the products they wish to sell which makes their profit higher.
Buying in bulk from the far East
Tesco often buy nonperishable items like furniture and televisions from other countries. This makes the store more costly efficient. Because they are manufacturing things in different countries like China they are saving money buying the equipment because the things there aren’t as rare. Things like Iron and Copper are running out in the UK and the more they run out, the more expensive it becomes as more people want it. Countries in the far East have a lot of these supplies so they would be willing to sell them for a cheaper price to Tesco. This makes Tesco money as well as the company that mines the metals.
Tesco also buys from abroad because the labor laws are a lot less strict. In the UK, the minimum wage is £6.19 an hour. This means that anybody that works in the UK has to make at least that much money in one hour. On the other hand in China there is no set minimum wage law so companies manufacturing the product can hire their workers for an incredibly cheap price. This saves Tesco money because they will not have to pay employees to make their products.
Training staff
Training the
Show More

Related Documents: Economies Of Scale Essay

ECONOMIES OF SCALE Essay

market. One of the key factors discussed is economies of scale which has a huge impact in the current business environment as it also plays a vital role to create barrier for other small businesses to enter as a possible contender or competitor in the same industry. Through this dissertation I would highlight key components around the concept of economies of scale to help elaborate how it influences the business or a specific industry. Economies of Scale basically means that buying or selling in bulk…

Words 685 - Pages 3

economies of scale Essay

1 Economies of scale-­‐ is when increasing scale of production leads to a lower long run average cost of production . 2 In 1996 the average price for used cars is hitting its maximum values –price index is 130, while at the same time new cars average price index is just…

Words 1155 - Pages 5

Examples Of Economies Of Scale In Business

assignment it will contain the fully concept of economies of scale and in order to be clear about the explanation of this topic, the example of an industry and company will be involved. The economies of scale are the key advantage for the business that able to grow. The economies of scale are the cost advantage that the business can exploit when the productive capacity and the range of capacities are enhanced; the average cost will be debased. Economies of scale mean the workers and managers organising…

Words 2028 - Pages 9

business studies- economies of scale Essay

Economies of scale: Purchasing economies- They are given discounts for buying in bulk, which reduces their costs Managerial economies -They can employ specialists, such as accountants and lawyers which can improve efficiency Financial economies- They can borrow money cheaper i.e. they pay less interest on borrowed money Marketing economies -They can reduce their promotional costs Risk-bearing economies- They can produce a range of goods/services. So, if one fails another will succeed Technical…

Words 408 - Pages 2

To what extent do you consider that the success of large businesses such as Tesco is due to economies of scale Essays

To what extent do you consider that the success of large businesses such as Tesco is due to economies of scale Economies of scale is the benefits that larger business have over their smaller competitors. This could be financial, marketing, technical or suppliers and this can have an effect on any stakeholders of the business. One benefit of economies of scale for Tesco is the buying power that they have. Because they are so large and have stored all over the world they bulk buy on extremely large…

Words 692 - Pages 3

The Short Run Is Essay

but the scale of production in which a firm operates cannot be changed in the short run such as buying or changing factory or establishment location, buying of heavy machinery. For firms to achieve these operational goals; it is only possible in the long run where such investments can be done freely; Therefore it is reasonable to say that a firms operational scale can be seen by how much influence in terms of change it has over its factors of production. A firm operating on a very big scale such as…

Words 468 - Pages 2

Summary of Economics of Strategy Book Essay

variable over other ranges AC(Q): average cost function; describes how the firms average cost function or per unit of output costs vary with the amount of output it produces.  When average costs decreases as output increases, there are economies of scale Margincal cost: refers to the rate of change of total cost with respect to output the incremental cost of producing exactly one more unit of output. Margincal cost often depeds on the total volume…

Words 1530 - Pages 7

Essay on Analysis of DSY company

strong or weak. It depends on following several aspects: economies of scale, product differentiation, demand for fund, switching cost. The same applies to Da San Yuan Restaurant. Avila, Ernesto A., 07/2001, Competitive Forces That Drive Civil Engineer Recruitment And Retention, Leadership & Management in Engineering, Vol. 1 Issue 3, p17 (一) Entry barriers low 1，China's current top - grade business banquet restaurants sizes are smaller, scale advantages are small. 2，Funding needs for low. 3，Resource…

Words 1999 - Pages 8

Implicit Cost Analysis

paper explores the difference between accounting and economic profit while giving two examples of when they differ. These examples led us in this paper to explain the difference between economies and diseconomies of scale. Finally, we provided examples of when an actual firm might benefit from economies of scale…

Words 1618 - Pages 7

Difference Between Implicit And Implicit Cost

Explain the difference between implicit and explicit costs. Give two examples of when an explicit cost is different from an implicit cost. The easier one to explain by far is explicit cost. Costs that a company will pay, whether it be for wages, rent, items that need to be purchased to run the company, etc. are out-of-pocket expenses. These items are easily placed in the financial books as expenditures. Implicit costs tend to be harder to differentiate. These costs aren’t necessarily placed…

Words 1234 - Pages 5