Treory ol lre F|rr

orlerl
0ojecl|ves ol lre l|rr
- Prol|l rax|r|sal|or
- 3al|sl|c|rg
0|vorce ol 0Wrersr|p ard orlro|
LaW ol 0|r|r|sr|rg Relurrs ard Relurrs To 3ca|e
osls
Ecoror|es ard 0|secoror|es ol 3ca|e
Tecrro|og|ca| crarge, cosls ard supp|y |r lre |org rur
Reverue
Prol|l
0ojecl|ves ol lre l|rr
0ojecl|ves are largels or goa|s lral a ous|ress sels
|lse|l
Tre lreory ol lre l|rr |s oased or lre assurpl|or
lral a|| ous|resses W||| operale lo ra|e a prol|l
8us|resses lace upWard s|op|rg lola| cosl ard
reverue curves - as rore |s produced cosls
|rcrease ard as rore |s so|d reverue |rcreases
arg|ra| cosls ard reverues
ll a ous|ress ras a doWrWard s|op|rg derard curve
reverue W||| r|se al a decreas|rg rale as producl|or r|ses
url|| rarg|ra| reverue equa|s zero
Al lr|s po|rl ary add|l|ora| ur|ls dor'l add arylr|rg lo lola|
reverue
Assur|rg lre |aW ol d|r|r|sr|rg relurrs |r lre srorl rur
lola| cosls W||| everlua||y slarl lo r|se al a lasler rale as
rarg|ra| cosls |rcrease
arg|ra| cosls ard rarg|ra| oerel|ls
Tre po|rl ol prol|l rax|r|sal|or |s Wrere lre
d|llererce oelWeer Tola| reverue ard lola| cosls |s
grealesl
Al lre po|rl ol prol|l rax|r|sal|or = R
Add|l|ora| 0ojecl|ves
Trere are add|l|ora| oojecl|ves lral a ous|ress
cou|d pursue |rc|ud|rg:
- 0roWlr
- 3a|es reverue rax|r|sal|or
- L|r|l pr|c|rg lo ga|r roropo|y poWer
- uslorer sal|slacl|or
Tre sal|sl|c|rg pr|rc|pa| sels a r|r|rur acceplao|e
|eve| ol acr|evererl
0|vorce ol 0Wrersr|p ard orlro|
0|vorce ol oWrersr|p ard corlro| |s Wrere lre
peop|e lral oWr lre ous|ress (lre srarero|ders) are
rol lre sare as lre peop|e lral corlro| lre
ous|ress (lre ooard ol d|reclors)
wrere lrere |s a d|vorce ol oWrersr|p ard corlro|
ous|resses ray rol pursue prol|l rax|r|sal|or as
lre raragers ray rave d|llererl oojecl|ves lo lre
oWrers
LaW ol 0|r|r|sr|rg Relurrs ard Relurrs
To 3ca|e
Tre |aW ol d|r|r|sr|rg relurrs says lral as We add
rore ur|ls ol a var|ao|e oulpul lo laclors ol
producl|or lrer oulpul W||| |r|l|a||y r|se ard lrer la||
0|r|r|sr|rg relurrs occur Wrer rarg|ra| reverue
slarls lo la|| as eacr exlra Wor|er |s add|rg |ess lo
lola| reverue
0|r|r|sr|rg relurrs ard producl|v|ly
0|r|r|sr|rg relurrs occur as lre producl|v|ly ol exlra
Wor|ers decreases over l|re
wrer oulpul |s |oW olrer laclors ol producl|or lerd lo oe
urder ul|||sed so eacr Wor|er |s ao|e lo use lre olrer
laclors rore ell|c|erl|y |rcreas|rg producl|v|ly
wrer producl|or reacres a cerla|r |eve| lre laclors ol
producl|or are |ess p|erl|lu| ard lrerelore eacr Wor|er
adds |ess lo producl|v|ly
LaW ol d|r|r|sr|rg relurrs ard cosls
LaW ol d|r|r|sr|rg relurrs car a|so oe ca||ed lre
|aW ol |rcreas|rg opporlur|ly cosl
Trere |s ar |rverse re|al|orsr|p oelWeer relurrs ol
|rpuls ard lre cosl ol producl|or
osls per ur|l ol oulpul W||| lrerelore slarl lo r|se al
a cerla|r po|rl
Producl|v|ly ard laclor pr|ces Producl|or
ard laclor cro|ces
Tre producl|v|ly ol d|llererl laclors ol producl|or W|||
|rl|uerce lre ous|resses cro|ce ol laclor |rpuls
Faclor pr|ces W||| a|so |rl|uerce lre cro|ce ol |rpuls
- |l sore laclors are rore expers|ve lrar olrers |l
|s |||e|y lral lre ous|ress W||| croose lrese over
rore expers|ve laclors
osls
osls - Wral a ous|ress pays oul
F|xed cosls - lrese do rol a|ler W|lr oulpul
var|ao|e cosls - a|ler d|recl|y W|lr lre ous|ress's
|eve| ol oulpul
Tola| cosls - are l|xed ard var|ao|e cosls added
logelrer
3er| var|ao|e - rave a l|xed ard a var|ao|e e|ererl
F|xed osls
Exarp|es - rerl, raragererl sa|ar|es, rales
0rapr|ca||y l|xed cosls W||| a|Ways oe |||uslraled oy
a ror|zorla| ||re
As oulpul crarges l|xed cosls slay lre sare
var|ao|e cosls
Exarp|es - lue|, raW raler|a|s
0rapr|ca||y var|ao|e cosls W||| a|Ways oe a d|agora|
||re lror lre or|g|r
As oulpul crarges var|ao|e a|ler d|recl|y
Tola| osls
aragers use lrese l|gures lo ra|e dec|s|ors or
|eve| ol oulpul ard pr|ces
Average osls
Average cosls are lola| cosls d|v|ded oy lre quarl|ly
produced
AT / A = T / quarl|ly
Average l|xed cosls la|| Wrer oulpul |rcreases as
lre l|xed cosls are spread over rore ur|ls
AF = F / quarl|ly
3rorl rur cosls
lr lre srorl rur cors|der l|xed ard var|ao|e cosls
Average lola| cosl ||re |s u-sraped as Wrer
d|r|r|sr|rg relurrs slarl lo ||c| |r lre average lola|
cosl per ur|l |rcreases
arg|ra| cosls
arg|ra| cosls re|ale lo var|ao|e cosls
arg|ra| cosls are lre arourl eacr add|l|ora| ur|l
adds lo cosls
arg|ra| cosls per ur|l decrease as producl|or
|rcreases url|| lrey reel a cr|l|ca| |eve| Wrer lrey
slarl lo |rcrease
3rorl Rur osls
Lorg Rur osls
lr lre |org rur a|| laclors ol producl|or car oe
var|ed so l|xed ard var|ao|e cosls car a|ler
Ecoror|es ol 3ca|e
Trese occur Wrer rass produc|rg a good resu|ls
|r |oWer average cosl.
Average cosls la|| per ur|l - Average cosls per ur|l
= lola| cosls / quarl|ly produced
Ecoror|es ol sca|e occur W|lr|r ar l|rr (|rlerra|) or
W|lr|r ar |rduslry (exlerra|).
lrlerra| ard Exlerra| Ecoror|es
lrlerra| Ecoror|es ol 3ca|e
As a ous|ress groWs |r sca|e, |ls cosls W||| la|| due lo
|rlerra| ecoror|es ol sca|e. Ar ao|||ly lo produce ur|ls
ol oulpul rore creap|y.
Exlerra| Ecoror|es ol 3ca|e
Are lrose srared oy a ruroer ol ous|resses |r lre
sare |rduslry |r a parl|cu|ar area.
Types of internaI economy
of scaIe
ExampIe
Production / TechnicaI
Economies
Larger firms can use computers / technology to replace workers on a
production line
Mass production lowers cost per unit
Large scale producers can employ techniques that are unable to be
used by a small scale producer.
Able to transport bulk materials.
Purchasing / Marketing
Economies
Advertising costs can be spread across products
Large businesses can employ specialist staff
Bulk buying if you buy more unit cost falls
FinanciaI Economies
Larger firms have better lending terms and lower rates of interest
Easier for large firms to raise capital.
Risk is spread over more products.
Greater potential finance from retained profits.
Administration costs can be divided amongst more products
ManageriaI Economies
More specialised management can be employed, this increases the
efficiency of the business decreasing the costs
Risk-bearing Economies
large firms are more likely to take risks with new products as they
have more products to spread the risk over
Exlerra| Ecoror|es ol 3ca|e
Trese are advarlages ga|red lor lre Wro|e
|rduslry, rol jusl lor |rd|v|dua| ous|resses.
Exarp|es ol Exlerra| Ecoror|es
As ous|resses groW W|lr|r ar area, spec|a||sl s||||s
oeg|r lo deve|op.
3||||ed |aoour |r lre area - |oca| co||eges ray oeg|r
lo rur spec|a||sl courses.
8e|rg c|ose lo olrer s|r||ar ous|resses Wro car
Wor| logelrer W|lr eacr olrer.
lav|rg spec|a||sl supp||es ard supporl serv|ces
rearoy.
Repulal|or
0|secoror|es ol 3ca|e
0ccur Wrer l|rrs oecore loo |arge or |rell|c|erl
Average cosls per ur|l slarl lo r|se
Types of diseconomy of
scaIe
ExampIe
Communication
When firms grow there can be problems with communication
As the number of people in the firm increases it is hard to get the
messages to the right people at the right time
n larger businesses it is often difficult for all staff to know what is
happening
Coordination and controI
probIems
As a business grows control of activities gets harder
As the firm gets bigger and new parts of the business are set up it is
increasingly likely people will be working in different ways and this
leads to problems with monitoring
Motivation
As businesses grow it is harder to make everyone feel as though the
belong
Less contact between senior managers and employees so employee
can feel less involved
Smaller businesses often have a better team environment which is
lost when they grow
0|secoror|es ol 3ca|e
Ecoror|es ol 3ca|e ard oropo||es
Ecoror|es ol sca|e car |ead lo lre deve|oprerl ol
roropo||es as |arger ous|resses are ao|e lo exp|o|l
|oWer ur|l cosls ard lrerelore ra|e rore prol|ls
Ecoror|es ol 3ca|e
|r|rur ell|c|erl sca|e - Wrere ar |rcrease |r lre
sca|e ol producl|or g|ves ro oerel|ls lo a reducl|or
|r ur|l cosls
|r|rur ell|c|erl p|arl s|ze - Wrere ar |rcrease |r
lre sca|e ol producl|or ol ar |rd|v|dua| p|arl W|lr|r
lre |rduslry doesr'l resu|l |r ary ur|l cosl oerel|ls
|r|rur Ell|c|erl 3ca|e
Tr|s |s lre po|rl Wrere producl|or |s sull|c|erl lor |rlerra|
ecoror|es ol sca|e lo oe lu||y exp|o|led
|r|rur ell|c|erl sca|e |s seer as lre |oWesl po|rl or lre
|org rur average cosl curve
Tre E3 deperds or a ruroer ol laclors |rc|ud|rg:
- Ral|o ol l|xed lo var|ao|e cosls
- ll a ralura| roropo|y ex|sls
Ecoror|es ol 3ca|e ard 8arr|ers lo Erlry
Ecoror|es ol sca|e car acl as a oarr|er lo erlry lor
l|rrs |rlo a rar|el
Tr|s |s oecause ecoror|es ol sca|e a||oW a l|rr lo
rave a |oWer cosl slruclure ard lrerelore car
decrease pr|ces |l a reW l|rr erlers lre rar|el
everlua||y dr|v|rg lrer oul
Tecrro|og|ca| rarge, osls ard 3upp|y
|r lre Lorg rur
lrverl|or, |rroval|or ard lecrro|ogy car |rpacl a
ous|resses oy decreas|rg cosls |r lre |org rur
lrroval|or, |rverl|or ard lecrro|ogy car a|so |rpacl a
ous|resses relrod ol producl|or - lor exarp|e caus|rg lre
l|rr lo rove lror |aoour |rlers|ve lo cap|la| |rlers|ve
relrods
Trese laclors ray a|so resu|l |r ar |rcrease |r ell|c|ercy
lor lre l|rr Wr|cr car a|so resu|l |r cosl sav|rgs
Reverue
Tola| Reverue = 0uarl|ly 3o|d x Average 3e|||rg Pr|ce
0erera||y |l |l reduces |ls se|||rg pr|ce you expecl lo se||
rore
A r|se |r pr|ce usua||y |eads lo a la|| |r quarl|ly so|d
Average reverue = Tola| reverue / oulpul
arg|ra| reverue = lre arourl eacr ur|l adds lo lola|
reverue
Reverue urves
arg|ra| reverue s|opes doWrWards - as rore |s
produced lre |rcrease |r reverue gels sra||er
8ecause rarg|ra| reverue dec||res as producl|or
|rcreases average reverue per ur|l a|so dec||res
W|lr |rcreased producl|or
Prol|l
Prol|l |s lre payrerl lor erlerpr|se - lre r|s|s lral
are la|er
Norra| prol|l - lr|s |s lre arourl ol prol|l reeded lo
|eep a|| laclors ol producl|or |r lre|r currerl use |r
lre |org rur
Norra| prol|l |s a r|r|rur |eve| lral |s reeded lor
ar erlreprereur lo slay |r lral ous|ress
3uperrorra| / aororra| prol|l - |s ary prol|ls lral
exceed lre rorra| arourl
Prol|l
Prol|ls are rax|r|sed Wrere lrere |s lre |argesl
d|llererce oelWeer R ard
Prol|ls rave a ruroer ol ro|es |r ar ecorory:
- 3uperrorra| or r|s|rg prol|ls allracl reW erlrarls lo
rar|els
- Rela|red prol|ls prov|de l|rarce lor lulure |rveslrerls
- A||ocal|or ol laclors ol producl|or - scarce laclors lerd
lo oe rore expers|ve ard W||| lrerelore oe used Wrere
lrey are |||e|y lo oe lre rosl prol|lao|e
3urrary
osl ous|resses ra|r oojecl|ve |s lral ol prol|l rax|r|sal|or
8us|resses a|so pursue add|l|ora| a|rs ard lrese ray oe sal|sl|c|rg ralrer lrar rax|r|s|rg
0|vorce ol 0Wrersr|p ard orlro| rears lral lre oWrer ol lre ous|ress does rol rur |l
LaW ol 0|r|r|sr|rg Relurrs slales lral as rore |rpuls are added lo producl|or oulpul W||| |r|l|a||y r|se
ard lrer |l W||| la||
arg|ra| cosls ard reverues |oo| al lre |rpacl ol eacr ur|l or lola| cosls / lola| reverue
osls reasure a|| experses ol a ous|ress ard car e|lrer slay lre sare W|lr oulpul (l|xed) or vary W|lr
oulpul (var|ao|e)
Ecoror|es ol sca|e occur Wrer a ous|ress |s ao|e lo reduce lre average cosl per ur|l as |l |rcreases |r
s|ze
Tecrro|og|ca| crarge ard |rroval|or |s ao|e lo reduce cosls ard |rcrease ell|c|ercy |r lre |org rur
Reverue reasures lre arourl ol rorey cor|rg |rlo a ous|ress, average ard rarg|ra| reverues
dec||re as producl|or |rcreases
Prol|l |s lre payrerl lor erlerpr|se
Norra| prol|ls are lre r|r|rur |eve| ol prol|l reeded lor a l|rr lo slay |r a rar|el