Economies of Scale (A level Econ)
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Economies of Scale
As a firm grows it is able to benefit from economies of scale due its increased buying and production power. A small firm cannot buy in large quantity from its suppliers and therefore has to pay a higher price than a larger competitor, who would be able to buy in bulk due to the increased amount of capital available to spend on resources.
The larger firm benefits by paying a lower unit cost and can produce its goods/services at a lower cost of production and can therefore make more profit than the small firm who make a smaller profit margin due to the fact that it costs them more to produce their goods.
In very competitive markets this can give firms the edge over their competitors as they will be able to charge lower prices for their goods yet still make enough profit to satisfy the owners. This explains why some of the most competitive markets are dominated by only a handful of massive firms with no small companies able to establish a foothold in the market as they are priced out very quickly.
