Economy of Scale, simply explained

The cost advantages taken in by companies when production becomes efficient are called economy of scale.

Companies can achieve economies of scale by increasing production and lowering costs.

This happens because costs are spread over a larger number of goods produced, obviously costs can be both fixed and variable.

The size of the business usually matters when it comes to economies of scale. Usually the larger the business volume, the more the cost savings.

Economies of scale can be both internal and external. Internal economies of scale are usually based on management executive decisions, while external ones are related to outside factors.

Economies of scale are an important concept for any business in any industry and represent the cost-savings and competitive advantages that in most cases bigger businesses have over smaller ones.

Most end consumers don’t understand why , usually a smaller business charges more for a similar product sold also by a larger company.

That’s because the cost per unit depends directly on the amount of units produced.

Larger companies are able to produce more by spreading the cost of production over a larger amount of goods simple as that.

Sometimes within an industry the cost of a product can be dictated if there are a number of different companies producing similar goods within that industry.

The several reasons why economies of scale give rise to lower per-unit costs,can be, specialization of labor and more integrated technology to boost production volumes.

Also , lower per-unit costs can come from bulk orders from suppliers. Finally, spreading internal operation costs across more units produced and sold helps to reduce costs.

A company can create a diseconomy of scale when it becomes too large and chases an economy of scale.

As mentioned above, there are two different types of economies of scale. Internal economies are generated from within the company. External ones are based on external factors.

Internal economies of scale happen when a company cuts costs internally, so they’re unique to that particular business organization .

External economies of scale, on the other hand, are achieved because of external factors, or factors that affect an entire segment in which the business operates . Meaning that no one controls costs .

Economies of scale are cost advantages companies experience when production becomes efficient, as costs can be spread over a larger amount of goods

A business’s size is related to whether it can achieve an economy of scale—larger companies will have more cost savings and higher production levels.

Economies of scale can be both internal and external. Internal economies are caused by factors within a single company while external factors affect the entire industry.

Published by Raffaele Felaco

I am an enthusiastic leader with strong background in direct and indirect sales with an exten- sive experience in both retail and wholesale business. I have been fortunate to have worked alongside teams in structured environments both in Italy and abroad over the last 20 years, en- abling me to develop strong leadership skills, a natural approach in effective communication, the ability of positively influencing others and master complex business negotiations.

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