Scale economies are efficiencies that result from increasing the size of the business.

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ECONOMIES OF SCALE
Economies of Scale Definition
Economies of scale refer to the cost advantages a company gains with the increase in production. This happens because production costs can now be spread over a large number of goods. The bigger the size of a company, the bigger the more the cost savings with the increase in production.

A company can achieve economies of scale in two ways - internal and external. In the first case, a company can rearrange their business equipment, man force and other production factors to increase production efficiency, thus lowering costs. Secondly, a company can grow in size, compared to its business competitors, and conduct negotiations for bulk purchases of raw materials, thus gaining an advantage over production costs.

Factors that determine economies of scale
The size of a company - A larger company will gain more advantage when it comes to economies of scale. The larger the business, the more the cost savings.

Internal Factors - This happens when companies work on internal factors to lower the cost of production. Changes in decisions in the management of a firm or increases in the size of the company are internal factors that affect economies of scale. Large companies can have an advantage because they can negotiate discounts while purchasing bulk materials for production, and use a special and advanced technology which generally requires a higher capital.

External factors - These factors affect a whole industry, thus benefitting every company in its line. External factors include - the availability of a highly-skilled labour pool, reductions in tax/subsidies, partnerships or joint ventures (resulting in higher capital).

Why do economies of scale help achieve lower costs per unit?

• Boost production by specialization of labour and use of integrated technology
• Spreading the cost of production over a larger number of units helps in the reduction of costs per unit
• Bulk orders from suppliers, larger buys and lower cost of capital

Limits to Economies of Scale
Economies of Scale are known to provide an advantageous edge to a certain company over its competitors in the market. However, according to a study by the Internal Monetary Fund, the overall prices of production and even the cost of equipment have been falling in almost all developing nations around the world. This may be due to the following reasons

Access to technology has increased in the past three decades, enabling even smaller producers to compete easily with large firms.

Micro-manufacturing, Hyper local manufacturing, and additive manufacturing (such as using a 3D printer) have reduced set-up and production costs.

What are economies of scale?
Economies of scale refer to the cost advantages a company gains with the increase in production

Why do small businesses charge higher for a similar product compared to large businesses?
Larger companies have the advantage of reducing cost per unit by spreading the cost of production over a large number of goods.

What is an example of economies of scale?
A common economy of scale is the networking effect. For example, social media sites like Facebook grew exponentially by attracting more customers, and increasing the amount it could charge for adverts.

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