Answer: Economies of scale refer to the cost advantages that a business can achieve as it produces more of a particular product or service. These advantages arise from spreading fixed costs over a larger number of units. There are several types of economies of scale a company might experience:

• Purchasing Economies: As production volume increases, the business gains more bargaining power with suppliers. This allows it to negotiate lower prices for raw materials, components, and supplies. Bulk discounts are a common example.
• Marketing Economies: Spreading marketing costs over a larger volume of products reduces the average marketing cost per unit. For example, advertising campaigns can be more cost-effective when they reach a wider audience. Brand recognition also becomes stronger with increased sales.
• Financial Economies: Larger companies often have easier access to finance and can secure loans at lower interest rates. They may also benefit from better credit ratings, further reducing borrowing costs. Spreading the cost of borrowing over a larger volume of sales also lowers the average cost of capital.
• Managerial Economies: Specialisation of labour becomes possible with increased production. This leads to more efficient management structures and the development of specialist managers. Larger companies can also afford to employ more skilled and experienced managers.
• Technical Economies: Larger production runs justify the use of more efficient and specialised machinery. This can lead to lower per-unit production costs. Technological advancements are also more easily adopted and implemented in larger factories. Automation becomes more economically viable.

However, it's important to note that diseconomies of scale can also occur if a business grows too large. These include problems with communication, coordination, and motivation of employees.

Three factors contributing to diseconomies of scale are:

• Poor Communication: As an organisation grows, communication becomes more complex and time-consuming. Information can be distorted or delayed as it passes through multiple layers of management. For example, a large manufacturing company might struggle to disseminate important policy changes effectively, leading to inconsistent application and errors. This can result in wasted resources and reduced productivity.
• Lack of Commitment or Loyalty from Employees: Large organisations can foster a sense of detachment among employees. They may feel less valued and less invested in the company's success. This can lead to decreased motivation, higher levels of absenteeism and staff turnover. For instance, a multinational retail chain might see lower customer service standards due to a lack of loyalty among its store staff.
• Weak Coordination: Coordination becomes increasingly difficult in larger organisations with multiple departments and processes. Lack of effective coordination can lead to duplication of effort, conflicting goals, and delays in production. Consider a large construction company where poor coordination between the design, procurement, and building teams can result in costly rework and project overruns.

Answer: A business can achieve financial economies of scale through several methods related to accessing and managing finance. These economies arise from spreading the costs of borrowing and financial administration over a larger volume of sales.

• Lower Interest Rates: Banks are often more willing to offer lower interest rates to larger, more established companies because they are perceived as less risky. A larger company's strong financial position provides greater security for the lender.
• Better Credit Ratings: Larger companies typically have better credit ratings due to their consistent profitability and strong financial performance. A good credit rating allows them to borrow money at more favourable terms.
• Access to Capital Markets: Larger companies can access capital markets (e.g., by issuing shares or bonds) more easily than smaller companies. This provides a wider range of funding options and potentially lower costs of capital.
• Lower Financial Administration Costs: Larger companies can spread their financial administration costs (e.g., accounting, auditing) over a larger turnover, resulting in lower per-unit costs. They can also invest in more efficient financial systems.
• Reduced Equity Financing Costs: A strong financial track record makes a company more attractive to investors, potentially leading to lower equity financing costs (e.g., lower required rate of return on equity).

Example: A large multinational corporation like Unilever can borrow money from banks at significantly lower interest rates than a small, local business. This is because Unilever's strong financial performance and global presence reduce the risk for lenders. Similarly, Unilever can issue bonds to raise capital, benefiting from economies of scale in administrative costs associated with bond issuance.