Managerial Economies of Scale

Introduction to Economies of Scale

• Economies of scale are cost advantages reaped by companies when production becomes efficient.
• Definition: As output grows, the average cost per unit falls.
• There are several types of economies of scale:
  • Managerial economies of scale
  • Purchasing economies of scale
  • Technical economies of scale

Managerial Economies of Scale

• As a business scales up, it employs specialist managers.
• Specialist managers are paid higher wages but improve efficiency.
  • Types of specialist managers:
    • Logistics specialist manager
    • Procurement specialist manager
    • Finance specialist manager
• Increased efficiency theoretically offsets the higher wage costs.

Example Breakdown

1. Before Hiring Specialist Manager:

   • Total Costs: £2 million
   • Total Units: 1 million units
   • Average Cost Per Unit (ACPU): £2 (i.e., £2 million / 1 million units)

2. After Hiring Specialist Manager:

   • Hiring increases total costs by £100,000 (new total cost: £2.1 million)
   • Efficiency gains allow production to increase by 200,000 units (new total units: 1.2 million units)
   • New ACPU: £1.75 (i.e., £2.1 million / 1.2 million units)

3. Illustration Using AC Diagram:

   • X-axis: Units of Production
   • Y-axis: Average Cost Per Unit
   • Initial position: 1 million units at £2 per unit
   • After hiring: 1.2 million units at £1.75 per unit

Conclusion

• Reduction in average cost per unit is beneficial for business competitiveness.
• Lower costs can result in better pricing strategies and higher market competitiveness.

Note

• Understanding managerial economies of scale is crucial for in-depth analysis of business efficiency and cost management.