Economy Of Scale
Economy Of Scale is the reduction in the per unit cost of production as the volume of production increases. In other words, the cost per unit of production decreases as the volume of production increases. Economies of scale are the cost advantages that enterprises obtain due to their scale of operation (typically measured by the amount of output produced), with cost per unit of output decreasing with increasing scale.
For example, a larger factory will produce power hand tools at a lower unit price, and a larger medical system will reduce the cost per medical procedure.
Types of Economy Of Scale
Economies of scale are important because they mean that as firms increase in size, they can become more efficient. For certain industries, with significant economies of scale, it is important to be a large firm; otherwise, they will be inefficient.
Internal Economies of Scale
Internal economies result from the sheer size of the company, no matter what industry it’s in our market it sells to. For example, large companies have the ability to buy in bulk. This lowers the cost per unit of the materials they need to make their products. They can use the savings to increase profits. They refer to economies that are unique to a firm.
External Economies of Scale
A company has external economies of scale if it receives preferential treatment from the government or other external sources simply because of its size. They refer to economies of scale faced by an entire industry. External economies and diseconomies of scale are the benefits and costs associated with the expansion of a whole industry and result from external factors over which a single firm has little or no control.
Diseconomies of Scale
As firms get larger, they grow in complexity. Such firms need to balance the economies of scale against the diseconomies of scale. For instance, a firm might be able to implement certain economies of scale in its marketing division if it increased output. However, increasing output might result in diseconomies of scale in the firm’s management division. Sometimes a company can grow so large chasing economies of scale that size becomes a disadvantage. This is called a diseconomy of scale. For example, it might take longer to make decisions, making the company less flexible.
Conclusion Of Economy Of Scale
Economies of scale is a practical concept that may explain real-world phenomena such as patterns of international trade or the number of firms in a market. The exploitation of economies of scale helps explain why companies grow large in some industries. Now you got the Economies of scale definition. The simple meaning of economies of scale is doing things more efficiently with increasing size or speed of operation.