What is the concept of economies of scale?

Very few persons have a sound knowledge about economies of scale. Though it is not a difficult term to understand but if you don’t have a clear concept about the term then it might be quite confusing. Economies of scale are actually the increase in efficiency of production, with the increase in the number of goods that are produced. In general, a company achieving economies of scale reduces the average cost per unit through an increase in production. This is because, over an increased number of goods, the fixed costs are to be shared.

Two types of economies of scale can be listed here. These are:
1. External economies - the cost per unit depends on the size of the industry, not the firm.

2. Internal economies - the cost per unit depends on size of the individual firm.

In the External economies the size of the industry determines the cost per unit. While in the internal economies the opposite happens. It is the size of the individual firm that determines the cost per unit.

An economy of scale enables big companies to have access to a larger market. By means of economies of scale, the bigger companies are allowed to operate with a wider geographical boundary. For small and medium companies size has its definite limits. After a certain point, an increase in output or productivity can cause an increase in production costs. This situation is known as diseconomies of scale.

[tags]economies of scale,internal economies of scale,external economies of scale[/tags]