Economies of scale

Laulau85

Hi,

Sorry if this is an obvious question but was just wondering if someone can explain what is meant by economies of scale?

Thanks for any help.

mark057

Economies of scale are achieved when a business purchases items in bulk for re-sale.

As the quantities are bought in bulk, the business purchasing the items can get a cheaper price per unit than buying in smaller quantities.

A good example is Tesco vs a Newsagent. As a customer a can of Coke costs less in Tesco than the Newsagent. This is because Tesco buy Coke in bulk and so pay a cheaper price which is passed onto the customer.

The Newsagent can't take advantage of this because they buy in much smaller quantities therefore pay more for their stock which is passed onto the customer.

mark057

It must also be said Economies of scale can be acheived through output too.

Greater expansion and output with a business will lead to lower unit costs.

Laulau85

Thanks for your help.