Economies of Scale

Economies of Scale

Economies of Scale

In the process to expand business, producers may benefit from the materialization of the economies of scale. The scale of production solely relies on the cost of production. The producers prefer to expand the scale or size of the production, as the costs can be hiked or reduced by increasing production.

The cost advantages obtained due to the scale of operation, output, and size of the enterprise is the economies of scale, which can be classified under various types as follows-

Internal Economy incurs the internal scale of a specific firm, the growth in the production from within a firm. It relates to various factors such as-

1. Administrative or Managerial Economy

It is where specialists are appointed to increase the efficiency, by managing bigger output with the same people, resulting in decreasing the administrative cost and increasing the production.

2.  Financial Economy

It relates to the finance where big firms deal with the loans from the bank, as the banks trust them more because of their large assets. It becomes easier for them to raise their share capital by issuing shares in the market.

3. Technical Economy

It arises mostly in firms where the capital cost, and the running cost of plants do not increase in proportion to their size. The main motive is to spread the fixed cost over huge output as possible.

4. Social Economy

It builds up the goodwill of the company, so as to attract more and more customers, and also enhances the loyalty of the company’s employers by providing bonuses.

5. Marketing Economy

It deals with the sales and the purchase of the raw materials as the large firms get bulk discounts when purchasing raw materials.

6. External Economy

The scale generally denotes having an effect on the whole industry. Economy related to industrialization where the activities like hiring employees, communication expenses or other essential services multiply, provide advantages to companies in the industrialized area.

7. Economy Related to Society

It is the provision of roads, schools and other facilities which is the responsibility of the state. The firms expand, and the provision of these facilities is a further advantage to the firms in that particular area resulting to raise the unit cost again.

8. Economies of Research

Large firms can spend huge sums of money on research to improve the quality of their products or incur variety to enhance the sale of the company, whereas, the new methods or innovation of the products can also help to reduce the average cost of the product.

9. Economy of Welfare

A large firm provides welfare facilities to its employees like crèches for the infants, subsidized canteens, subsidized housing, recreation facilities etc. These facilities provided to the employees have an indirect impact on increasing the production and also reducing the costs.

10. Risk Bearing Economies 

These produces variety of products and a large number of items, to cover up the loss in one sector by balancing the gain in the other. The larger the size of the firm, the more is their chances to incur losses, so diversification helps to maintain the balance.

11. Technical Economy

It is that where the usage of better techniques and machines increases the production and decreases the cost per production.

12. Labor Economy

Large company hires a large number of employees where each person can be employed according to his capability. Big firms attract specialized experts which encourage new inventions and saves time.

Economies of scale apply to different kind of business situations and variety of organizations at various levels like manufacturing unit or plant an entire enterprise. It is cost advantages that a firm obtains due various factors, whether it is output, scale of operation etc. providing cost advantage over a competitor.