Economies of Scale

The economies of scale exist by the increase of the output of the goods through additional units while the costs decrease. Types of economy of scale

1. Technical economies are the cost savings a firm makes as it grows larger, and arise from the increased use of large scale mechanical processes and machinery. For example, a mass producer of automobiles can benefit from technical economies because it can employ mass production techniques and benefit from specialization and a division of labor.

2. Purchasing economies are gained when larger firms buy in bulk and achieve purchasing discounts. For example, a large supermarket chain can buy its fresh fruit in much greater quantities than a small fruit and vegetable supplier.

3. Administrative savings can arise when large firms spread their administrative and management costs across all their plants, departments, divisions, or subsidiaries. For example, a large multi-national can employ one set of financial accountants for all its separate businesses.

4. Large firms can gain financial savings because they can usually borrow money more cheaply than small firms. This is because they usually have more valuable assets which can be used as security (collateral), and are seen to be a lower risk, especially in comparison with new businesses. In fact, many new businesses fail within their first few years because of cash-flow inadequacies. For example, for having a bank overdraft facility, a supermarket may be charged 2 or 3 % less than a small independent retailer.

5. Risk bearing economies are often derived by large firms who can bear business risks more effectively than smaller firms. For example, a large record company can more easily bear the risk of a ‘flop’ than a smaller record label.

The economies of scale and scope are all found in the industry wherein it has the large scale of distribution, production, and retail for the process of cost advantage over the only small scale. There many sources of the economies of...