concept of economies of scale with examples

Economies of Scale

The mean % change in the average cost of the production following a 1% increase in output.

There are two types of Economies of scale-

1.      External economies of scale

2.      Internal economies of scale

External economies of scale- It occurs outside the firm but within the industry. When the long-term expansion of an industry leads to the development of the ancillary services which benefits suppliers in the industry. 

 For example- When an industry expands machinery and raw material available to all the firms in cheaper rates. Latest techniques of production is discovered. Better means of transportation and communication is available. Experienced and trained labour and facilities of workshop are also available. Entry of new firms enables the firms to produce their output at lower cost.

Internal economies of scale- Internal economies are those which are open to a single factory (or) a single firm independently of the action of other firms. This results from an increase in the scale of output of a firm and cannot be achieved unless output increases.

For example- When a business make large purchases or borrow a lot of money unlike small purchases and loans, they get special discounts.

  So, Purchasing products in large amounts will decrease the cost of a single unit, which results in lower sum spent.