Economies of Scale
Economies of Scale refer to the reduction in per-unit costs achievable by distributing fixed costs over a higher level of production. It is generated when increased production lowers the average production cost of each unit.
Ways to Utilize Economies of Scale
This phenomenon occurs when businesses decide to adopt one of the two ways listed below -
First, if a company can get a discount by buying component parts in bulk, it can lower its variable costs per unit as it grows larger.
Second, by increasing production, a company can distribute its fixed costs over a greater number of units.
These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage. Scale economies in production, research marketing, and service are probably the key barriers to entry into the mainframe computer industry.
Economies of scale can also act as hurdles in distribution, utilization of the sales force, financing, and nearly any other part of a business. Economies of scale are the savings and/or cost-cutting that companies achieve because of increased volume.
For example, if the tiny pizza shop down the road decides to increase the efficiency of pizza assembly by adopting technologies like big pizza chains, they’ll have to make an effort to increase sales so that the huge investment in technology is covered by the amplified profit. This would be a great example of how economies of scale work.
Use of the Term in Sentences
- Businesses must keep the economies of scale in mind while considering cost-cutting and generating maximum profit.
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