A business has total costs of £200,000 at an output of 10,000 units, and £340,000 at 20,000 units. Calculate the average cost at each level.

At 10,000 units the average cost is £200,000 ÷ 10,000 = £20, and at 20,000 units it is £340,000 ÷ 20,000 = £17.

Total costs are £200,000 at an output of 10,000 units and £340,000 at 20,000 units. State by how much the average cost has fallen and explain what this shows.

Average cost falls from £20 to £17, a fall of £3 per unit, which shows the business is enjoying economies of scale because doubling output has less than doubled total cost.

Distinguish between internal and external economies of scale.

Internal economies arise from the growth of the individual business itself, while external economies arise from the growth of the whole industry or area in which it operates.

What are purchasing economies of scale?

Purchasing economies arise because a business ordering in large quantities negotiates a lower price per unit from its suppliers.

WJEC A-Level Business 601-5238-2

Enterprise and Starting a Business

Topic overview Enterprise and the entrepreneur Stakeholders in a business Business plans and sources of support Legal structures of business The public and private sectors Business location Sources of finance for a new business Business revenue, costs and profit

Markets and Market Research

Topic overview Types of market Market size, market share and market trends Market segmentation The degree of competition in a market Perfect competition and monopolistic competition Oligopoly and monopoly Consumer protection Demand and the demand curve Supply and the supply curve Market equilibrium and changes in price and quantity Price and income elasticity of demand Inferior, normal and luxury goods The value of market research Primary market research Secondary market research Qualitative and quantitative data Sampling and avoiding bias

Marketing

Topic overview Market orientation, product orientation and asset-led marketing The marketing mix Product and the product portfolio Branding, USP and differentiation The product life cycle Extension strategies The product life cycle and cash flow The Boston matrix Pricing strategies Choosing the right pricing strategy Promotion: above the line and below the line Place and distribution channels The marketing mix in different contexts and global marketing New technology in marketing

People in Business

Topic overview The flexible workforce New technology and changing working practices Workforce planning The recruitment process, job analysis and job descriptions Internal and external recruitment Methods of selection Training Appraisal Labour productivity, absenteeism and labour turnover Organisational design and structures Delegation, empowerment and delayering Motivation theories Financial and non-financial methods of motivation Management and management by objectives Leadership styles and theories Employment rights, duties and equal opportunities Trade unions, conflict and dispute resolution

Operations Management

Topic overview Added value Job, batch and flow production Choosing the right method of production Productivity Capacity utilisation New technology in operations Lean production and kaizen Just-in-time and cell production Quality control and quality assurance Total quality management Stock control and stock control diagrams Purchasing and working with suppliers Innovation, research and development Internal economies of scale External economies of scale Diseconomies of scale and the survival of small firms

Business Finance and Accounts

Topic overview Internal sources of finance Loans, overdrafts and trade credit Share capital and venture capital Leasing and debt factoring Choosing an appropriate source of finance Finance for entrepreneurs and SMEs in Wales Revenue, costs and profit Types of cost Contribution and break-even Break-even charts and the margin of safety Budgets and budgeting Cash flow forecasting Improving cash flow The income statement Gross and net profit margins

Business Analysis and Decision-Making

Strategy and Implementation

Topic overview Aims and objectives SMART objectives Mission and vision statements Corporate, divisional and functional strategy Strategy, tactics and corporate plans SWOT analysis Porter's Five Forces The Ansoff matrix Organic growth Mergers and takeovers Horizontal and vertical integration Franchising as a method of growth Location and relocation decisions Rationalisation and outsourcing production

Managing Change and Risk

Topic overview Internal and external causes of change Planned and unplanned change The effects of change on a business Managing change effectively Storey's four approaches to managing change Resistance to change Lewin's three step process Organisational culture and leadership in change Evaluating the management of change The risks a business faces Risk assessment and preventative action Insurable and uninsurable risks Contingency planning and crisis management

The External Environment

Topic overview Government and the framework for business The economic environment Social and demographic change Technology and business Business ethics and corporate social responsibility The legal environment Business and the environment

Global Business

Topic overview International trade and protectionism Globalisation and its causes Global growth strategies and multinationals The European Union and the euro

Operations Management

Internal economies of scale

2 things to know
AS Unit 2

Overview

Economies of scale, formula for average cost and minimum efficient scale.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What is meant by economies of scale?

Numbers

State the formula for average cost.

Questions from this subtopic

Each one with the model answer underneath.

1
What is meant by economies of scale?
Model answer
Economies of scale are the reductions in average cost per unit that a business achieves as its scale of output increases.
2
State the formula for average cost.
Model answer
Average cost = total cost ÷ total output.
3
A business has total costs of £200,000 at an output of 10,000 units, and £340,000 at 20,000 units. Calculate the average cost at each level.
Model answer
At 10,000 units the average cost is £200,000 ÷ 10,000 = £20, and at 20,000 units it is £340,000 ÷ 20,000 = £17.
4
Total costs are £200,000 at an output of 10,000 units and £340,000 at 20,000 units. State by how much the average cost has fallen and explain what this shows.
Model answer
Average cost falls from £20 to £17, a fall of £3 per unit, which shows the business is enjoying economies of scale because doubling output has less than doubled total cost.
5
Distinguish between internal and external economies of scale.
Model answer
Internal economies arise from the growth of the individual business itself, while external economies arise from the growth of the whole industry or area in which it operates.
6
What are purchasing economies of scale?
Model answer
Purchasing economies arise because a business ordering in large quantities negotiates a lower price per unit from its suppliers.

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Enterprise and Starting a Business

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People in Business

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