Definition of economy of scale

At the behest of the microeconomics, which is that branch within the economy that addresses the economic behavior exhibited by individual economic agents, such is the case of consumers, companies, investors and workers, the economy of scaledesignates the advantages, benefits, that a company achieves in terms of costs as a result of its expansion.

Benefits that a company experiences in terms of lowering its costs thanks to the expansion it achieves through various resources such as: the investment made in machines, raw materials ...

In this context of company expansion, expenses will suffer a significant drop, the higher the production, the cost that the company in question has to produce its products will be much lower than in another situation.

Basically, the first and beneficial consequence is that there will be an advantage for each extra unit that is generated.

Generally, when production increases by x situation, the average cost that a product faces decreases.

It should be noted that this economic context is plausible and visible in the long term of a business and not in the short term.

This drop in the unit price of production that we mentioned is not reduced due to a drop in the price of raw materials that they intervene in the production but rather in the fact of taking advantage of a material that is available, that is, that was already bought with previously, with which money was disbursed in a timely manner when the purchase was made, and not today, a fact that generates that advantage that we talked.

Generally this possibility occurs when the company in question points to an enlargement in every sense, for example, expanding its workspace, buying new and more production machinery, among other issues, which will precisely allow the incorporation of more people, or use the new machines to increase production, and thus that cost for each product will be infinitely lower compared to the situation previous.

Factors influencing cost reduction

Between the factors that contribute to the reduction of this cost are: increase of Inventory(This implies the important purchase of materials from long-term contracts); quality in management (increase the specialization of managers); financial benefits (through programs financing in banks); marketing and technology (use both tools with the mission of increasing production on the one hand and knowledge of the products and services that are produced on the other).

Deseconomics of scale, the other side

On the other hand, the concept that confronts us is that of diseconomies of scale, because contrary to what happens with economies of scale, companies, in this scenario, suffer an increase in the cost per unit of product or service that they produce.

In the scenario that we have been describing, the more products are produced, the cheaper their production is, however, the reduction in costs in these types of economies has a clear limit and it is when the company reaches a maximum point of size, because although the context it will make the costs per unit lower, what will happen at the same time is that it will become more complex to manage a company that has increased in size

In the natural monopoly, as the type of monopoly is known, characterized by the fact that the monopoly company in question brings together all market production at a lower cost, the economies of scale that concern us play an important role.

In these situations, it is much more efficient for the company to expand than for other companies to come into play, because naturally this monopoly does not have competence.

For example, the market power of the company will be really important.

Economies of scale have been very relevant, that is, they have had a notable influence on the creation of the large conglomerates of companies in the market and on their functioning satisfactory.

By this we mean that this process that involves economies of scale is highly beneficial for the growth of a company, but of course, and as we have seen, there will always be a ceiling.

Topics in Economy of Scale