As a business grows, it can experience economies of scale Where the average costs (of production, distribution and sales) fall as the business increases the amount of product that it produces, distributes and sells.. This is when the average unit costThe average cost of making one product. of a product falls.
The formula for unit costs is:
Unit costs = total costs ÷ output.
Purchasing economies of scale
As a business gets bigger, it is able to buy in bulk. They will be given bulk-buy discountA cheaper price offered to customers when they buy a large quantity of something. which will reduce the unit cost of each product. For example, if a business purchased 100 products, they may be charged £12 for each product. If a business purchases 500 products, they may be charged £7.50 for each product.
Technical economies of scale
As a business gets bigger it can purchase more advanced machinery and equipment. They can also purchase larger buildings to produce more.
As unit costs fall, the firm will make more profitsThe amount of money made after all costs are deducted. per unit. They can also reduce their selling price to make themselves more attractive to potential customers without losing profit.
