Economies Of Scale Definition
Economies of scale are the reduced costs that a business can achieve by increasing its production output. The concept applies to both manufacturing and non-manufacturing businesses. For example, a company that produces more goods can spread the fixed costs of production, such as depreciation, over a greater number of units. This reduces the average cost per unit and gives the company a competitive advantage in the marketplace.
There are two main types of economies of scale: internal and external. Internal economies of scale occur within a company as it grows larger. External economies of scale occur when a company benefits from being part of an industry or market that is growing larger.
Economies of scale can be classified as either static or dynamic. Static economies of scale exist when there is a one-time opportunity to reduce costs by increasing output. For example, if a company buys new equipment that enables it to produce twice as many goods with the same amount of labor, then it has achieved static economies of scale. Dynamic economies of scale exist when there are ongoing opportunities to reduce costs by increasing output. For example, if a company expands its operations into new markets, it can achieve dynamic economies of scale by spreading its fixed costs over a larger number of units sold.
The main disadvantage of economies of scale is that they can lead to monopolies. When one company achieves such a large degree of cost reduction that it becomes the dominant player in an industry, other companies may find it difficult or impossible to compete. This
