Economies of Scale

The concept of economies of scale defines the process of production where, if the firm's scale is increased, the firm can enjoy a decreased average cost in the long run for each unit of production. In another way, it can also be said that when product or service is produced in large units but with less cost of inputs, the firm is believed to achieve the economies of scale (ES). The principle says that when the production units of a company are increased, the company can experience better chances to decrease the production costs. This theory also says that a company can attain economic growth when the economies of scale for the company are achieved.

The converse of the economies of scale, diseconomies of scale are also true. The diseconomies of scale occur when a firm's production is less than the input proportion. The concept of diseconomies of scale refers to the inefficiencies within the industry or firm eventually causing a rise in the average production costs. The various inputs that affect the production of a firm are - costly inputs, learning inputs, techniques and organizational inputs and specialized inputs.

The economies of scale can be of two types - internal economies of scale and external economies of scale. A firm is said to achieve the goal of internal economies of scale if it succeeds to reduce the production costs and increase the production. On the other hand, the concept of external economies of scale is true within the industry and outside the firm. The achievement of external economies of scale of an industry is dependent on the various external factors and it results in a subsequent production cost decrease for the entire industry. When the external economies of scale are achieved, all the firms of that particular industry are benefited.

Any firm can enjoy the economies of scale by expanding the operation scale. The various actions that the firms can take to achieve the economies of scale are - purchasing bulk amount of materials for production through the long-term contracts, enhancing the managerial specialization, trying to get low-interest charges while borrowing from financial institutes and also spreading the advertising cost over a large type of output.