Given this story, I am (my younger brother is) asked why (rather than how?) a particular company Pepper plc is likely to benefit from economies of scale.

In short, Jo has a shop that sells electrical goods made by Pepper plc, a large-scale business. Nearby, many people are unemployed so they can't really buy new stuff. However, they might be able to pay to repair their old stuff.

What exactly is the relevance?

Economies of scale is, from what I vaguely remember from introductory micreoceonomics (if I remembered, I guess I wouldn't be here) and understand on Investopedia, an advantage that comes from more production namely that if more of a particular product is produced, but only up to a certain point, any particular unit would cost less.

This is because fixed costs per unit decrease with more units, again, only up to a certain point.

Help please?

Note that for some reason we are talking about Jo's shop while we are asked about Pepper plc.

For reference, here is the whole story:

enter image description here

  • $\begingroup$ Why downvotes?? $\endgroup$
    – BCLC
    Jun 11 '15 at 13:29
  • 1
    $\begingroup$ I'm not sure why you were down voted (I think the question is fine). My guess is that people don't like the fact that you included a screen shot of some text in your question because this means the text is not searchable. $\endgroup$
    – Ubiquitous
    Jul 4 '15 at 19:08
  • $\begingroup$ @Ubiquitous Thanks. I couldn't copy the text from the link. $\endgroup$
    – BCLC
    Jul 6 '15 at 12:22

The story (and Jo) have basically nothing to do with the benefits Pepper plc will get from economies of scale. As you have stated economies of scale means that the average cost (cost per unit) is less if you produce in large quantities.

An example: Assembling a car with drills and screwdrivers is really difficult and time consuming but a robotized assembly line can do it quite quickly. However, the assembly line costs a lot of money so it will only pay off if a lot of cars are produced.

Since Birmingham, where Pepper plc. is located, is a large city it has a large market for electronic consumer goods. Therefore Pepper plc. can sell a lot of these goods, hence it has reason to produce in bulk, so the unit cost is less. Thus the company may sell its products cheaper or have a higher profit. (This depends on the market environment.)

  • $\begingroup$ Oh I get it now. The relevance is the last part while the first part is for the other questions. Thanks. (To future readers: Some stuff including the stuff about market research was removed from the handout given to my brother.) $\endgroup$
    – BCLC
    Jun 11 '15 at 13:34

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