Question

Explain what is economy of scale and name few companies that are benefiting from economies of scale?

The types of economies of scale ?

the effects of economies of scale?

the sources of economies of scale?

and examples for companies economies of scale?

Please detailed answer.......

thanks

Answer 1

Economies of Scale refers to the cost advantages gained by firms when production becomes efficient. When firms increase their production level, firms gain due to costs spread over a larger number of goods.

Companies like United Parcel Service, Wal-Mart Stores, Compass Minerals (CMP), Excelon Corporation, Intel Corporation are the few examples that are benefitting from economies of scale.

There are types of Economies of Scale as given by Marshall:

1. Internal Economies of Scale: Internal Economies results from a larger level of production. These economies are special to each firm in an industry. One firm can enjoy the benefits of the good recruitment process, other firm may enjoy benefits from adopting efficient techniques of production, so on and so forth. Real And Technical Economies are the major subtypes in these type of Economies. Real Economies are associated with a reduction in inputs, labor, and capital. Technical Economies are associated with the benefits reaped from using efficient machinery goods.

2. External Economies of Scale: External Economies refers to the benefits which accrue to all the firms included in industry. Benefits are reaped from the increased scale of production in an industry.

Sometimes, the industry becomes too large in size that it exhibits diseconomies of scale.

Effects of Economies of Scale:

1. Effect on Nature of the Industry: Economies of Scale determine the nature of the industry i.e. increasing cost industry, constant cost and decreasing cost industry.

2. Effects on Cost of Production: It reduces per-unit fixed and per unit variable cost. The external economies reduce the cost of production and shift the long-run AC curve upwards whereas external diseconomies increase the cost of production and shift the long-run AC curve upwards. An industry is said to be an increasing cost industry when the external diseconomies outweigh the external economies.

Common Sources of Economies of Scale are:

1. Purchasing: Purchase of goods in bulk through long term contracts.

2. Managerial: Increasing the specialization of managers.

3. Financial: Access to a large range of financial instruments and receiving lower interest charges during borrowings from the bank.

4. Technological: Reaping benefits from returns to scale in the production function

5.Marketing: Spreading the cost of advertising over a larger output