Economies of scale The advantages of size Prep Economies of scale • Reductions in long term average costs that arise through increasing the scale of production. Question • Would you prefer to work for a large or a small firm? • What would be the advantages / disadvantages of each? Why do firms benefit from increasing production? http://www.economist.com/node/21538156 How does the shipping company manage to send a t-shirt to Europe from China for just 2.5 cents (US)? Why are profits currently falling in this industry? How do firms like Maersk try to survive? Economies of scale Purchasing Marketing Financial Technical Managerial Risk bearing Diseconomies of Scale Motivational problems Communication problems External economies of scale Purchasing Marketing Financial Technical Managerial Risk bearing Research Question • You are going to research and find out about how a particular company benefits from economies of scale • Example IKEA: To what extent does this multinational experience economies of scale? • Initial questions: • What does IKEA produce? • What factors of production does IKEA use? (how many tonnes of wood) • Where does IKEA produce its goods • How does IKEA market their products • How does IKEA structure their management? • What technology does IKEA use to produce their goods? • How does IKEA transport their goods around the world? • How does IKEA ensure that prices are kept low?