Question

Why do you think certain businesses enjoy economies of scale and others do not? Can you think of some examples of types of bussiness that can benefit from economies of scale and those that probably cannot? Why?

Answer 1

Small businesses often have fewer opportunities to apply economies of scale for the simple reason that they are small and unlikely to engage in mass production. When economies of scale are interpreted broadly, the generalization is accurate enough. Small businesses also have economies of scale available in effect— and increasingly so as a result of modern developments in the services and electronics sectors.

Most small businesses gain economies of scale by obtaining their payroll services from a large payroll company; they receive specialized services, including annual tax notices, at much lower costs than they could do by hiring in-house a payroll accountant. Accounting services are likewise obtained, often in tandem with the use of modern software to store data at the company's location and to have a qualified accountant review and use the software for tax purposes

Examples of economies of scale are:

Tap Water – High fixed costs of a national network

Water companies had to invest in a vast network of water pipes that extended across the country to provide tap water. The investment's fixed cost is very high. Nonetheless, it brings down the average price as they supply water to over 25 million households. Would it be worth another water company to create another water pipe network to compete with the existing company, though? No, because if they had only a small market share, the average cost would be very high and they'd go out of business. This is a natural monopoly example–one of which is the most productive number of firms.

When you spend £ 100 on a national tv advertising campaign, if you're a big national business like Starbucks or Coca-Cola, it's only worth it.

Developments in technology and the proliferation of the Internet have created economies of scale at low cost for the small business that can be used by the small business. A small business with a handful of employees, a few computers, and an Internet connection in the mid-2000s could deliver services that would need 200-some-odd employees in the 1950s. Aspects of this subject are discussed throughout this volume in a variety of different ways. The Internet has made it possible for small businesses to be much more competitive in buying, marketing, recruiting, data collection, accounting, credit sales, desktop publishing, and other fields.