A Closer Look in the Economies of Scale Businesses wanted to reduce their cost to the minimum without compromising the product quality and violating laws. The total fixed cost decreases if the output increases. Thus the business is left with the variable cost to manage. Notably, the concept of the economies of scale also works for the government, non-profit organizations and individuals. The entity becomes more efficient as it produces more output and reduces cost as a result. The organization can benefit from the economics of scale, consequently, the consumers enjoy lower prices, and the economy expands to increase more demand. For huge businesses, economies of scale provide a competitive advantage over small enterprises. There are two types of economies of scale. The cost that the management can control is internal, while the cause for the cost to decrease attributed to geographic location, government policies, and industry changes are externals. Typically the internal economy of scale is found in large businesses as a result of their capacity to produce a vast volume of outputs. For instance, a large business can purchase raw materials in quantity and request for price discounts. A lower-cost, the company can increase its profit or reduce the product price to compete with other businesses in the market. Economies of scale have five types. Manufacturing firms that succeeded in reducing their cost to 50 percent to 75 percent when doubling output enjoyed a technical economy of scale. In such a manner, the firm succeeded in taking advantage of more efficient equipment. For instance, a BPO company can target a specific market niche. Shipping firms use supertankers can transport huge volumes of petroleum to take advantage of reducing transport costs. A large firm can easily take advantage of the technical economies of scale compared to their smaller competitors. A single seller is a monopoly, but a single buyer is a monopsony. A monopsony has the power to decide on the purchasing price to reduce its per-unit cost. For instance, Wal-Mart can offer a lower price to their customer due to its huge buying power. A large firm can hire effective and efficient managers to run the operation of the business. For instance, a top-caliber salesperson can sell a big volume of products when it takes months for an ordinary salesperson to accomplish such a feat. Thus regardless of the high commission seasoned salesperson demand, they are worth it. Large firms can afford to hire these managerial economies of scale. The capacity of a firm to quickly secure credit with a lower interest rate is called financial economies of scale. A large firm can simply offer additional stock in the market and raise capital in less than a week. Also, these firms can issue bonds at a lower interest rate due to their higher credit ratings. Since a large business enjoys an extensive connection with other businesses such as suppliers and customers, it can quickly generate more business. Primarily this is called network economies of scale, which cost the business almost nothing. A specific preferential treatment a large company enjoys from the government is an external economy of scale. For instance, the government reduces taxes for the firm to expand operations and hire more workers. Some big real estate firms succeeded in convincing local governments to build roads and infrastructure near to several of their projects. The government granting such request assist the firm to reduce its cost and increase the saleability of their projects. On the other side, a small enterprise can cluster together to enjoy the economies of scale. For instance, restaurants can converge in a specific location to take advantage of the geographic economies of scale. Nonetheless use the concept of economies of scale to our advantage. For instance, buying in bulk is a lot cheaper than buying in pieces. Since manufacturers save on packaging materials and distribution, the price of products in bulk is lower. At the same time, we travel less to stores and save on our transport costs.
A Closer Look in the Economies of Scale
Businesses wanted to reduce their cost to the minimum without compromising the product quality and violating laws. The total fixed cost decreases if the output increases. Thus the business is left with the variable cost to manage. Notably, the concept of the economies of scale also works for the government, non-profit organizations and individuals. The entity becomes more efficient as it produces more output and reduces cost as a result.
The organization can benefit from the economics of scale, consequently, the consumers enjoy lower prices, and the economy expands to increase more demand. For huge businesses, economies of scale provide a competitive advantage over small enterprises.
There are two types of economies of scale. The cost that the management can control is internal, while the cause for the cost to decrease attributed to geographic location, government policies, and industry changes are externals.
Typically the internal economy of scale is found in large businesses as a result of their capacity to produce a vast volume of outputs. For instance, a large business can purchase raw materials in quantity and request for price discounts. A lower-cost, the company can increase its profit or reduce the product price to compete with other businesses in the market.
Economies of scale have five types. Manufacturing firms that succeeded in reducing their cost to 50 percent to 75 percent when doubling output enjoyed a technical economy of scale. In such a manner, the firm succeeded in taking advantage of more efficient equipment. For instance, a BPO company can target a specific market niche. Shipping firms use supertankers can transport huge volumes of petroleum to take advantage of reducing transport costs. A large firm can easily take advantage of the technical economies of scale compared to their smaller competitors.
A single seller is a
A large firm can hire effective and efficient managers to run the operation of the business. For instance, a top-caliber salesperson can sell a big volume of products when it takes months for an ordinary salesperson to accomplish such a feat. Thus regardless of the high commission seasoned salesperson demand, they are worth it. Large firms can afford to hire these managerial economies of scale.
The capacity of a firm to quickly secure credit with a lower interest rate is called financial economies of scale. A large firm can simply offer additional stock in the market and raise capital in less than a week. Also, these firms can issue bonds at a lower interest rate due to their higher credit ratings.
Since a large business enjoys an extensive connection with other businesses such as suppliers and customers, it can quickly generate more business. Primarily this is called network economies of scale, which cost the business almost nothing.
A specific preferential treatment a large company enjoys from the government is an external economy of scale. For instance, the government reduces taxes for the firm to expand operations and hire more workers. Some big real estate firms succeeded in convincing local governments to build roads and infrastructure near to several of their projects. The government granting such request assist the firm to reduce its cost and increase the saleability of their projects.
On the other side, a small enterprise can cluster together to enjoy the economies of scale. For instance, restaurants can converge in a specific location to take advantage of the geographic economies of scale.
Nonetheless use the concept of economies of scale to our advantage. For instance, buying in bulk is a lot cheaper than buying in pieces. Since manufacturers save on packaging materials and distribution, the price of products in bulk is lower. At the same time, we travel less to stores and save on our transport costs.
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