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What is Economies of Scale?
Economies of scale (ES) can be defined as a decrease in the average costs of production when there is an increase in the scale of production of a company, it refers to a situation when the number of production surges and the cost per unit dips. It occurs when there is a reduction of costs given a proportional rise in production. Economies of scale enable a firm to sell its products at more competitive prices and to capture a considerable share of the market.
How is Economies of Scale achieved
Economies of scale are said to be achieved when more units of a good or service can be produced on a larger scale with (on average) fewer input costs.
To put it simply, when a firm is able to produce its output at a minimal unit rate, reduce the cost of production and make a profit from producing more units to reach the target. As a result, Economies of scale make a company more efficient.
Economies of Scale explained with an example
A small company like X produces 100 bulbs at an average cost of Rs 400 per bulb. A medium-sized firm like Y produces 200 bulbs at a cost of Rs 200 per bulb. A large-sized firm like Z produces 300 bulbs at a cost of Rs 100 per bulb. Economies of scale exist when the larger scale of production leads to lower average costs. Economies of scale provide big firms with an edge over smaller ones as the larger the business, the lower its per-unit costs.
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