Talk about Economies of scale

Economies of scale are the cost advantages that a business can exploit by expanding their scale of production in the long- run. The effect is to reduce the long run average cost of production over a range of output .These lower costs are an improvement in productive efficiency and can feed through to consumers in the form of lower market price .But they can also give a business a competitive advantage in the market. They lead to a lower prices but also higher profits,consumers and producers will both benefit. The definition in our text book is a reduction in long run average costs resulting from an increase in the scale of the production.

And economies of scale divide into two types Internal and External economies of scale . And Internal Economies of scale include :

• Technical economies of scale .Means that the business is large enough can afford to invest in expensive and specialist capital machinery.And the specialisation of the workforce (the division of labour)when the business is bigger usually the organisation is better so the efficiency is higher.


• Marketing economies of scale and only buyer power.A large firm can spread its advertising and marketing budget over a large output and it can purchase its factor inputs in bulk at negotiated discounted price if it has buying power in the market.


• Financial economies of scale .Larger firms are usually rated by the financial market to be more credit worthy and have access to credit facilities, with favourable rates of borrowing.

External Economies of scale : They are occur outside of a firm within an industry .Thus when an scope of operations expend due to for example the creation of a better transportation network,resulting in a subsequent decrease in cost for a company working within that industry ,external economies of scale are said to have been achieved. And the other one is research and development facilities in local universities that several business in an area can benefit from .

There are some disadvantages of economies of scale:

• Standardization of products .Limiting the amount of effective consumer choice in the market .
• lack of market demand .Market demand maybe insufficient for economies of scale to be fully exploited .
• Developing monopoly power.it is may lead to a loss of allocate inefficiency.
• Protecting monopoly power .Sets barrier to entry for the new business.