What are economies of scale?

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Firms benefit from economies of scale whenever their production gets more efficient. Economies of scale can be achieved through increasing output and cutting costs. Since costs are distributed among a greater number of commodities, this occurs. Fixed and variable costs are both present.

When it pertains to economies of scale, the company’s size matters. The bigger the company, the greater the cost savings. External and internal economies of scale can be both possible. The result of management actions is internal economies of scale, whereas external economies of scale are the result of external forces.

Economies of scale are an essential notion for any company in any sector, as they symbolize the cost savings & competitive advantages that bigger companies have over smaller ones. Economies of scale lead to cheaper per-unit costs for several reasons. 

To begin with, labor specialization and even more integrated technology increase output volumes. Second, reduced per-unit costs can be achieved by higher advertising buys, supplier bulk orders, or lower capital costs. Third, spreading internal function costs all over a larger number of units produced and sold lowers costs.

Effects of Scale Economies on Production Costs:

1. It lowers the fixed cost per unit. Because of the increased output, the fixed cost is spread out over a large area than before.

2. It lowers variable costs per unit. This happens as the production process becomes more efficient as the scale of production increases.

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Pieter Borremans
By Pieter Borremans

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