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In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Economies of Scale

The economies of scale represent an interesting concept that the costs of producing a good keep going down with the increase in the number of goods. It is due to the fact that there are always fixed and variable costs attached to the production of certain items. A larger number divides the fixed costs over a larger spread therefore reducing the unit cost of such products.

Economies of scale either depend on internal factors such as the efficient use of machinery or are created due to external factors such as the capacity of transportation. Many companies around the world perform mergers in order to grow the overall size of their business, and take the advantage of the economies of scale.

Understanding the Concept

The economies of scale are an important concept that is used around the world. The costs of transportation, equipment set-up, and trainings are some of the fixed cost examples. These costs remain the same regardless of the number of production figures. This means that it will always be ideal to go for a maximum number of products in any given scenario.

A company may find that it can double its production by increasing the available assets and capital by a fraction of the current costs. This allows the company to aggressively pursue additional markets as it will be able to lower the price of its products by dividing them over a larger volume.

Applies to Industries with Fixed Costs

The concept of economies of scale only applies to industries and companies that have fixed production costs. This is evident in any industry where designing and machine set-up is required. The IT industry is a modern industry where this concept is not often valid, because the creation of a single website does not facilitate the process of the second one. Similarly, graphics designs are all unique, and therefore, cannot use the economies of scale.

Some Problems

It is not always possible to benefit from economies of scale. Some companies grow so large and are already producing so many products that it is not possible for them to expand any further. Economies of scale no longer applies to them because such large conglomerates start to suffer from administrative issues, as it is difficult to control a large organization, and keep up similar working standards especially if there are multiple production facilities.

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