On day 3 of the Year 13 Recap we consider how firms can achieve cost efficiencies as the production scale within the business increases.
Whenever a business produces more goods, costs rise to reflect the increased input of factors of production in the process. However, the relative change in costs to extra output created is an important area for a business to focus on.
This is because if over time, output increases at a quicker rate than costs of production, this results in average costs falling over time. If this is the case, then the firm experiences economies of scale and develops a cost advantage over time. However, for many small to medium sized enterprises, the potential economies of scale available in the market are not always as significant some of the larger firms in large industries.
Here Jack guides you through the revision slide on economies of scale: