Economies Of Scale Essay

ECONOMIES OF SCALE

In microeconomics, economies of scale refers to the cost advantages which an enterprise obtains due to size, output or scale of operations , with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.Often operational efficiency is also greater with increasing scale, leading to lower variable cost.

Economies of scale applies to a wide variety of organizational and business situations and at various levels of an enterprise, such as a business or manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility is expected to have a lower cost per unit of output than a smaller facility, when all other factors are equal, while

Marshall suggested that broad declines in the factors of production, such as land, labor and effective capital, represented a positive externality for all firms. These externality arguments are offeredin defense of public infrastructure projects or government research.

There are several different kinds of internal economies of scale. Technical economies are achieved from the use of large-scale capital machines or production processes. The classic example of a technical internal economy of scale is Henry Ford's assembly line. Another type occurs when firms purchase in bulk and receive discounts for their large purchases, or a lower cost per unit of input. Cuts in administrative costs can cause marginal productivity to decline, resultingin economies of scale.

Internal economies of scale tend to offer greater competitive advantages than external economies of scale. This is because an external economy of scale tends to be shared among competitor firms. The invention of the automobile or the Internet helped producers of all kinds. If borrowing costs decline across the entire economy because the government is engaged in expansionary monetary policy, the lower rates can be captured by multiple firms. This does not mean any external economy of scale is a wash. Companies can stilltake relatively greater or lesser advantage of external economies of scale. Nevertheless, internal economies

Even if the firm remains small the localized industry presence in one or two locations benefits huge costs benefits as the concentration of the industry is huge. For example most of the manufacturing of undergarments are specific to only a particular province in China which inadvertently leads to large scale importance to these sectors. The external and internal scales of economies are important for trade in general at competitive costs and margins in general for the industry.

The industry in which the external economies of scale are only applicable would generally be formed by small companies only and would be under the influence of perfect competition mostly. The larger firms if are possessing cost benefits and advantages to their smaller counterparts and internal scales are advantageously benefitted lead to imperfectly competitive environment.

If external economies of scale are crucial than the company with a large industry base in that sector would flourish than a country with a small industry base. The external economies will play to the advantages of the industry and larger the industry the larger would be the advantages in servicing costs, operating and manufacturing and processing