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Economics of Scale Article Printed

Economies of scale refer to the cost advantages that large companies and organizations enjoy over smaller ones due to the ability to spread fixed costs over a higher output of production. There are internal economies of scale, related to efficiencies within a company's own operations, as well as external economies that depend on external factors like industry, location, or government policies. Examples of internal economies include bulk purchasing discounts, specialized management roles, cheaper access to capital, and network effects for online businesses. External economies can include preferential tax treatment or infrastructure support from governments seeking to attract large employers. While economies of scale provide advantages, companies can also face diseconomies if they grow too large and decision-making becomes inefficient.

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Pragnyaraj Bisoyi
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67 views2 pages

Economics of Scale Article Printed

Economies of scale refer to the cost advantages that large companies and organizations enjoy over smaller ones due to the ability to spread fixed costs over a higher output of production. There are internal economies of scale, related to efficiencies within a company's own operations, as well as external economies that depend on external factors like industry, location, or government policies. Examples of internal economies include bulk purchasing discounts, specialized management roles, cheaper access to capital, and network effects for online businesses. External economies can include preferential tax treatment or infrastructure support from governments seeking to attract large employers. While economies of scale provide advantages, companies can also face diseconomies if they grow too large and decision-making becomes inefficient.

Uploaded by

Pragnyaraj Bisoyi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Economies of Scale

Economies of scale is the competitive advantage that large entities have over smaller ones.
The larger the business, non-profit, or government, the lower its per-unit costs. It can spread
fixed costs, like administration, over more units of production.
Types of Economies of Scale
There are two main types of economies of scale: internal and external. Internal economies are
controllable by management because they are internal to the company. External economies
depend upon external factors. These factors include the industry, geographic location, or
government.
Internal Economies of Scale
Internal economies are a result of the sheer size of the company. It doesn't matter what
industry it's in or 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. Or, they can pass the savings to consumers and compete on
price. There are five main types of internal economies of scale.
Technical economies of scale result from efficiencies in the production process
itself. Manufacturing costs fall 70-90 percent every time the business doubles its output. Larger
companies can take advantage of more efficient equipment.
For example, data mining software allows the firm to target profitable market niches. Large
shipping companies cut costs by using super-tankers. They can use post-Panamax ships that
carry as many as 16 trains. Finally, large companies achieve technical economies of scale
because they learn by doing. They’re far ahead of their smaller competition on the learning
curve.
Monopsony power is when a company buys so much of a product that it can reduce its per
unit costs. For example, Wal-Mart's "everyday low prices" are due to its huge buying power.
Managerial economies of scale occur when large firms can afford specialists. They more
effectively manage particular areas of the company. For example, a seasoned sales
executive has the skill and experience to get the big orders. They demand a high salary, but
they're worth it.
Financial economies of scale means the company has cheaper access to capital. A larger
company can get funded from the stock market with an initial public offering. Big firms have
higher credit ratings. As a result, they benefit from lower interest rateson their bonds.
Network economies of scale occur primarily in online businesses. It costs almost nothing to
support each additional customer with existing infrastructure. So, any revenue from the new
customer is all profit for the business. A great example is eBay.
External Economies of Scale
A company has external economies of scale if its size creates preferential treatment. That's
most often occurs with governments. For example, a state often reduces taxes to attract the
companies that provide the most jobs. Big real estate developers convince cities to build
roads to support their buildings. This saves the developers from paying those costs. Large
companies can also take advantage of joint research with universities. This lowers research
expenses for these companies.
Small companies don't have the leverage to benefit from external economies of scale. But
they can band together. They can cluster similar businesses in a small area. That allows them
to take advantage of geographic economies of scale . For example, artist lofts, galleries, and
restaurants benefit by being together in a downtown art district.
Diseconomies of Scale
Sometimes a company chases economies of scale so much that it becomes too large. This is
called a diseconomy of scale. For example, it might take longer to make decisions, making
the company less flexible. Miscommunication could occur, especially if the company
becomes global. Acquiring new companies could result in a clash of corporate cultures. This
will slow progress if they don't learn to manage cultural diversity.
How to Make Economies of Scale Work for You
You don't have to be a corporation to benefit from economies of scale. Think of it like being
able to buy in bulk if you have a larger family. Each box of detergent costs less per wash
because you can buy it in bulk. The manufacturer saves on packaging and distribution. It then
passes the savings onto you. Bulk is also cheaper for you because you make fewer trips to the
store.
Economies of Scale Versus Economies of Scope
Economies of scope occur when a company branches out into multiple product lines. They
benefit by combining complementary business functions, product lines, or manufacturing
processes. For example, most newspapers diversified into similar product lines, such as
magazines and online news. This diversified their revenue away from declining newspaper
sales. Their advertising sales teams could sell ads in all three product lines. It's easy to confuse
economies of scale with economies of scope, because they are both found in larger
companies. Just remember that economies of scale apply to one product line. Economies of
scope refer to combining efficiencies from many product lines.

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