Economies of Scale
Why Big Businesses Can Be More Efficient
Economies of Scale: As you make more stuff, each unit becomes cheaper to produce.
How does this happen?
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Bulk Buying Power:
- Buying raw materials in huge quantities usually gets you a big discount.
- Think: Bulk flour is cheaper than a small bag for one cake.
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Specialized Equipment & Labor:
- You can afford expensive, highly efficient machines if you run them all the time.
- You can hire specialists for specific tasks, making them faster.
- Think: A robot arm on an assembly line is only worth it for high volume.
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Spreading Fixed Costs:
- The cost of a factory, R&D, or a marketing campaign gets divided by more units.
- Think: Designing one car model costs millions, but if you sell a million cars, that design cost per car is tiny.
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Financial Advantages:
- Bigger companies often get lower interest rates on loans.
The Downside (Diseconomies of Scale):
- Too Big: Sometimes, a company can get too big, becoming bureaucratic, slow, and inefficient. Average costs start to rise again.
Golden Rule: Pursue growth to achieve scale, but be aware of the point where bigger stops being better.