What do economies of scale refer to?

Answer 1

Reduction in cost per unit resulting from increased production, realized through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls.

Answer 2

Economies of scale are the money firm could save, when it expands itself. For example, if firm's average cost per 1 unit is 10 at the output of 100 unit and when it expands its output to 200 unit, the average cost per 1 unit drops to 8, then the firm enjoys economies of scale. So they occur, when a percentage increases equally in all inputs leads to a greater percentage change in output. Inputs are land, labour and capital and output are the goods and services the firm produces

Answer 3

Large scale buying and selling give the firm important savings in cost.

1. Bulk buying
2. Specialist buyer
3. Branding
4. Specialist transport
5. Sales outlets
6. Advertising

Answer 4

Reduction in cost per unit resulting from increased production, realized through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit falls.

Answer 5

Economy of scale exists subject to a few factors:

1.) Nearly everything purchased requires shipping - if you purchase a large quantity of an item, and it is priced with shipping, the cost-per-item to ship is reduced, therefore reducing the seller's cost-per-item.

Example: If you buy 200 lbs of cotton rags at $0.20/lb, it fits on a pallet and it costs $200 to ship, so the total is $240.00 or $1.20/lb.

If you buy 1000 lbs. of rags at $0.20/lb, it costs the same to ship, so the total is $400.00 or $0.40/lb.

2.) Most things purchased require a labor element involved. If a worker making $10/hour conducts 4 transactions in an hour with a profit of $2/each, the company looses money. If a worker conducts 4 transactions in an hour with a profit of $20/each, the company makes money.

Example: This is why companies like Amazon.com offer free shipping on purchases over $25. The average retail markup is 50%, so each transaction of $25 is equal to around $12.50 in gross profit. You must subtract labor cost from the gross profit to get the net profit. By eating $5 in shipping, Amazon gets you to conduct a transaction of at least $12.50 in profit, so the laborer packaging material is packaging something which is actually profitable for the company.

On the flip side, if a purchaser did not meat the $25 minimum, they pay a shipping charge of around $9.95, but it only costs the seller around $4.50, so they make up for their loss by putting a margin on the shipping fee to help cover their labor rate.

2.) In order for a company to make money, they must either have a high markup on their goods, or sell a large volume, ideally both. If a company can turn a large quantity of inventory to one purchaser, it is worthwhile to sell it for a lower margin rather than wait another 30-60 days to sell the inventory to several clients. With the profit from the bulk sale, the company can resupply inventory and still have product to sell to the several additional clients, so in the same time period, they move more product and make more money.

Also worth consideration is when dealing with a single customer for a large purchase there are less ancillary costs involved when compared to selling the same volume to several smaller clients. Each customer purchase involves collecting payment, either by check or plastic. Plastic will incur merchant service fees, and a check must be taken (by labor) to the bank. There is typically paperwork to track the transaction for accounting purposes, ranging from a simple receipt to a multi-step process of setting up a customer account, purchase order, invoice, mailing of an invoice, etc.

The final point of consideration is a term called "inventory turns." a "turn" of inventory is when all of a given amount of purchased inventory has been delivered and sold. In retail clothing, the goal is 4 turns per year. For produce, it is more like 12 turns per year. It is necessary to have money tied up in inventory, but the quicker one can turn the inventory, the faster the money will make a profit, become liquid capital again, and the profit can be re-invested for a larger volume of inventory if demand justifies, which begins an exponential process of sales growth.

In short, the faster you can turn your inventory, the better, so turning it quickly at a lower profit margin is attractive (depending on how low of a margin) to many business models.