Economies of Scale

Written by Iskander Shyngyssov | Proofread by Yasmin Uzykanova

One of the advantages of growth is the opportunity to gain economies of scale. This is when the cost of manufacturing reduces as the scale of production increases; the more units a company produces, the cheaper the cost of production per unit becomes. This is due to fixed costs such as marketing being distributed across more units.

Internal Economies of Scale

These occur due to the increase in the size of the firm. Internal Economies of Scale include:

Purchasing/bulk buying

•   Firms can get discounts from a supplier for buying in larger quantities

  Marketing

•   Large firms can employ or buy more expensive but more efficient outlets, like television advertising, to promote their product.  

  Technical

•   A firm can invest in product development or better technology to increase the efficiency of their production processes

External Economies of Scale

These occur due to factors that the firm cannot control. External Diseconomies of Scale include:

Skilled labor

•   When a specific industry gets concentrated in a single geographic location, it creates a larger workforce with the requisite capabilities.

  Infrastructure

•   Geographical areas are frequently designed and developed to satisfy the unique needs of distinct businesses. Such development might include constructing transportation and information systems that increase data availability and quality.

  Access to suppliers

•   This happens when firms establish their operations in close proximity to larger firms to offer them specialized services at various phases of the manufacturing process, such as the provision of raw materials.