Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
7.4
1
Th
e following items are a selection of business costs:
■ 
the rent of a factory
■ 
taxes paid on turnover
■ 
pay of production workers
■ 
electricity charges
■ 
interest on outstanding loans
■ 
management salaries
■ 
transport costs
■ 
depreciation on fi xed capital.
Indicate whether each one is likely to be fi xed or 
variable in the short run.
A
Units of output
0
Cost
FC
G
TC
F
B
C
E
D
Figure 7.12
2 
Study 
Figure 7.12.
What is the:
a 
ATC at output G?
b 
AVC at output F?
c 
AFC at output G?
d 
TC at output F?
155
Chapter 7: The price system and the microeconomy 

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or economies depend on the nature of the economic 
activity. Some of the following may apply in a particular 
fi rm or industry:
■
Technical economies: This refers to the advantages gained 
directly in the production process. Some production 
techniques only become viable beyond a certain level 
of output. A good example is in the case of container 
vessels, which over the years have continued to grow 
in size, resulting in a lower average cost per container 
carried. Making full use of capacity is also important on 
a production line. Car production is the result of various 
assembly lines. The number of finished vehicles per hour 
is limited by the pace of the slowest sub-process. Firms 
producing on a large scale can increase the number of 
slow-moving lines to keep pace with the fastest, so that 
no resources are standing idle and the flow of finished 
products is higher. This is one of the reasons why in 2009 
Tata Motors in Mumbai was able to produce the first of 
thousands of its Nano cars. At a price of around $2,500, this 
no-frills vehicle puts car ownership within reach of lower-
income families.
Car production in India – an example of technical economies 
of scale
■ 
Purchasing economies:
 
As firms increase in scale, they 
increase their purchasing power with suppliers. Through 
bulk buying, they are able to purchase inputs more cheaply, 
so reducing average costs. One of the best examples of this 
is the US retail giant Walmart, which uses its purchasing 
power to stock goods in its stores at rock bottom prices. All 
major retailers behave in this way.
■ 
Marketing economies:
 
Large-scale firms are able to 
promote their products on television and in newspapers 
at lower rates because they are able to purchase large 
amounts of air time and space. They are also likely to be 
able to make savings in their costs of distribution because 
of the large volumes of products being shipped.
■ 
Managerial economies:
 
In large-scale firms these come 
about as a result of specialisation. Experts can be hired 
to manage operations, finance, human resources, sales, 
logistics and so on. For small firms, these functions oft en 
have to be carried out by a multi-task manager. Cost savings 
are expected to accrue where specialists are employed.
■
Technological economies: Many types of firm can make 
cost savings through the application of online ordering and 
booking systems. Particularly good examples are the online 
search engines for consumers who want to buy insurance, 
flights and hotel accommodation. Firms using this 
technology can reduce the number of people they employ, 
so reducing average costs.
■ 
Financial economies: Large-scale firms usually have better 
and cheaper access to borrowed funds than smaller firms. 
This is because the perceived risk to the lender is lower.
■
Risk-bearing 
economies:
 
These might explain why, as firms 
get larger, they become more risk averse by spreading their 
business activities in a more diversified way. A diversified 
conglomerate can cover any losses in one activity with the 
profits from another, an option not open to smaller firms. 
Risks can be further reduced by cooperating with rivals on 
large capital projects.