Economies of Scale

Description of Economies of Scale. Explanation.

Definition Economies of Scale. Description.

Economies of Scale is a term that refers to the reduction in per unit costs which arises from an increase in production.

The initial investment in capital is diffused through an increase in production, and the marginal cost of producing a good or service decreases when each additional unit of production is added. Economies of scale occur when larger firms are able to lower their unit costs. This may happen for a variety of reasons. A larger firm may be able to buy in bulk (Purchasing Economies of Scale), it may be able to organize production more efficiently (Production Economies of Scale), it may be able to raise capital cheaper and more efficiently (Financial Economies of Scale), it may be able to spread the costs of uncertainty more efficiently (Risk-bearing Economies of Scale), it may be able to spread the costs of advertising and promotion more efficiently (Marketing Economies of Scale).

Note that bigger is not always better. Larger firms can be more difficult to manage, due to their complexity. This may cause diseconomies of scale, especially when the external environment of firms is complex or changes quickly.

Compare also: Competitive Advantage  |  Sustainable Competitive Advantage  |  Synergy  |  Working Capital  |  Globalization  |  Glocalization

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End of description Economies of Scale. An explanation.