Economies of Scale

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Cost advantages that are reaped by businesses when production becomes efficient is known as economies of scale. Businesses achieve it by increasing the production and lowering costs as costs are spread over a large number of goods which can be both fixed and variable.

Generally, the size of the business matters when it comes to economies of scale as the larger the business is, more would be their cost savings.

Economies of scale could be internal and external where internal is based on management decisions and external ones are based on outside factors.

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. Firstly, the specialisation of labour and integration of technology helps in boosting production volumes. Secondly, lower per-unit costs comes 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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