Concept of Economies of Scale

Economies of Scale:

Economies of scale is occurred when an increased in output leads to lowering the unit costs. In the microeconomics, economies of scale are cost advantages that an employee obtain due to scale of operation, with the increasing scale and decreasing in cost per unit of output.

Economies of scale occur when products share common inputs and diversification leads to cost savings. The common sources of Economies of scale are bulk purchasing of the materials through the long term contracts, managerial (increasing managers), financial (when borrowing from banks obtaining lower interests), marketing (advertising), technology (returns to scale in production).

Example:

• Supermarkets are benefited from economies of scale because they buy food in bulk and get lower costs.
• Economies of scale can occur in a complex production industry like in cars. The manufacturing of car involves many complex stages. So, the stages are split up for producing a certain part with its specialization. A worker can be specialized in design in car, testing etc. Specialization requires less training and more production.