Business – 9.1 Location and scale – Scale of operations | e-Consult
9.1 Location and scale – Scale of operations (1 questions)
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Model Answer: Economies of scale occur when a firm’s average (unit) costs fall as output increases. This happens because fixed costs are spread over more units and variable costs per unit can be reduced through more efficient production techniques, bulk purchasing, specialization, and better use of technology.
- Technical economies*: Larger plants can use more advanced, automated machinery that produces more units at a lower marginal cost.
- Purchasing economies*: A retailer buying 10,000 units of a product can negotiate a lower price per unit than when buying 1,000 units.
As a result, the unit cost curve slopes downward in the range where economies of scale are operating.