Economies of Scale



Cost advantages reaped by businesses when production becomes efficient is called as economies of scale. Businesses achieve it by increasing the production and lowering costs as it is spread over a large number of goods which can be fixed and variable.
Generally, size of the business matters when it comes to economies of scale as the larger the business is, more would be their cost savings. This could be internal and external i.e., internal is based on management decisions and external ones are based on outside factors.
Economies of scale are considered to be an important concept for any business belonging to any industry; it represents the competitive advantages and cost savings held by larger businesses over smaller ones.

There are various reasons why economies of scale mean lower per-unit costs. Majorly, the specialisation of labour and integration of technology helps in boosting volumes of production. Then, lower per-unit costs come from bulk orders given by suppliers and larger advertising buys or lower cost of capital. And lastly, spreading internal function costs across more units manufactured and sold helps in reducing costs. Internal functions include information technology, accounting and marketing. Here, the first two reasons are considered as operational efficiencies and synergies. And the others are cited as benefits of mergers and acquisitions.

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