Business Studies Essay

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1. What is meant by the term ‘economies of scale?’ The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. 2. Explain why economies of scale are important to companies such as McDonald’s and GBK. Economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical reach. Often, large firms in industries with high fixed costs can take advantage of savings that smaller firms cannot. Economies of scale characterizes a production process in which an increase in the scale of the firm causes a decrease in the long run average cost per unit. Economies of scale can be enjoyed by any size firm expanding its scale of operation. It is important to companies such as McDonald’s and GBK because firstly, a large business can pass on lower costs to customers through lower prices and increase its share of a market. Secondly, a business could choose to maintain its current price for its product and accept higher profit margins. 3. a) What are marketing economies of scale? As a firm grows the average cost of advertising per unit will fall, leading to lower average costs. e.g., small firms are unable to afford large scale advertising campaigns, while their larger competitors are able to finance television and radio campaigns. b) Explain two reasons why McDonald’s will be able to achieve more marketing economies of scale than GBK. McDonald’s is the market leader in the UK; the company is a much bigger firm than GBK with 1,225 UK outlets. A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient

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