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Glossary

What is Economies of Scale?

Economies of scale is a cost advantage that arises with the increased output of a product. Economies of scale arise owing to the inverse relationship between the quantity of production and fixed cost for per unit. Greater the quantity of a good produced, the lower the per-unit fixed cost. ES also helps in reducing the variable cost per unit because of its operational efficiencies and synergies. ES can be best classified into two types: one is the internal ES that arises within the company; and second one is the external ES that arises out of extraneous factors such as industry size. Larger centers have lower costs per call than small organizations.

As businesses continue to expand its scale of operations, it gears up for its long run. The benefits arising from expansion depend upon the effect of expansion on productive efficiency, which can be assessed by looking up for change in average costs at each stage of production.

Assume that you are the owner of a small business and you wish to promote your products and services. To market, you would ostensibly require flyers, brochures and promotional ads etc. The printer quotes a price of $5,000 for 500 copies, and $10,000 for 2,500 copies. 500 copies would cost you more than 2,500. This means that the printer is passing on a part of the cost advantage of printing for you. The cost decreases with the rise in production. Outsource call center service providers help in streamlining the economies of scale of the company.

With reduction in the cost and increasing production, internal economies of scale can be been achieved. Economies of Scale lower down operational expenses and implement best-in-class technology to streamline business functions.

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