Economies of Scale

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Economies of Scale: It can be divided into two types: internal and external. Internal economies – is the advantages that a firm enjoys as it grows. For example, a large firm is able to employ more specialist staff, afford more expensive equipment and gain bulk-buying discounts which may not be possible for a smaller firm.

External economies – arise when an industry becomes concentrated in one particular part of the country. Local colleges may well develop specialist training courses to meet the needs of the industry and businesses will be set up supplying specialist services to meet the needs of the known for its steel industry. For example, for over 100 years Sheffield was known for its steel industry and response, the local universities and colleges developed metallurgy and other specialist courses. Business grew offering repairs, maintenance and support services for the steel manufacturing industry and associated trades. Sheffield thus became attractive as a location for a steel-related business.

The Local Labour force: The size and quality of the local labour force may also be relevant in deciding where to locate a business. If a manufacturing business needs to recruit 400 workers for a proposed new factory then this will be difficult in a rural district with a small population. In these circumstances a location near to a large population centre is preferable. If the business needs to recruit skilled workers, for example, those with computer skills, it will need to locate in an area where there is a skilled workforce with appropriate skills.

University towns can be useful source of well-educated and trained workers. Significant numbers of hi-tech and research business are located on business parks on the outskirts of Cambridge and Oxford. A pool of skilled labour grows up in an area where particular industries are concentrated, encouraging more new businesses to locate there.

Local employment levels: The local employment rate may play a part in the decision where to locate. The UK currently has one of the lowest unemployment rates in Europe. However, unemployment is not evenly spread and some parts of the country have high levels of unemployment e.g. Northern Ireland, parts of west Cornwall and the north-east f England. If a business needs a large supply of semi-skilled or unskilled workers it may well consider locating to an area of high unemployment. It will be easier to recruit workers in this sort of area where there are significant numbers of unemployed workers looking for work, whereas it will be much more difficult in a prosperous area with high levels of employment.

Wage Levels: The average wage offered by businesses varies significantly in different parts of the country. Wages in the south-east of England tend to be higher than in, for example, south-Wales. For some firm’s, wages account significant proportion of their total costs so a area tend also to be areas of above average unemployment as workers are keen to find work and are prepared to accept lower wages. However, if a firm needs workers with a skill that is in short supply they may have to accept that they will have to offer relatively high wages. A shortage of computer analysts or bricklayers in London or the South East will force up wages and businesses will have no choice but to offer higher wages if they are to recruit and retain workers.

Customers’ suppliers: For some businesses, a site near to suppliers of key raw materials and components may be the main factor in deciding where to locate. There are a number of vehicle manufacturers in the West Midlands such as Rover, Land Rover and Jaguar. Over the years, a wide range of suppliers have grown up in the area such as companies supplying electrical fittings, tyres and important components. A new business or relocating business will want to be confident that will have easy access to all the materials that it needs in production.

Historical Reasons: A business will sometimes stay in location long after the original reasons for locating there have gone. This is known as industrial inertia. Once established in an area a business may be reluctant to relocate, with all the expense and upheaval that this involves. The area around Stoke on the Trent is known as the Potteries. This is because during the 18th and the 19th centuries a large number of pottery and earthenware businesses set up in an area because of the availability of suitable fireclay. However, despite the fact that production methods have changed, earthenware and chinaware businesses such as Waterford Wedgwood and Royal Doulton still in the area.

Demographic change: Demographic change refers to changes in the population over a period of time. Over the last thirty years, some parts of the country have experienced increases in population as people move into the area in search of work. Other areas have experienced falls in population as people move away from the area because of high unemployment e.g. parts of west Cornwall. These demographic changes will have a significant impact on local businesses. If population declines in a locality then businesses, particularly small shops and cafes, will find that they have fewer customers, revenue falls and they may decide to close down.

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