Economies of scale

Economies of scale means % drop in average cost of production following a 1% increase in output

· External economies of scale

· Internal economies of scale

Economies of scale occurs whenever a firm’s marginal costs of production decreases

While we are talking about the economies of scale it helps to understand about the average cost curve

For example: -

Google providing Gmail for free will not increase marginal cost of google,

In the same way google drive, creating a space will not cost anything extra.

But at one point of time economies of scale will give up i.e., dis-economies of scale than there will be rise in average cost curve.

This is explained well in BCG matrix’s- the companies which fall under dogs will tell about dis -economies of scale.

Economies of scale will teach how to reduce cost while highly playing with volumes.

As we talked about economies of scale lets us know about the economies of scope.

In simple words economies of scope means same set of inputs used to different outputs

For example: -

Newspaper industry

Inputs are similar but we they are trying to produce multiple outcomes

Like newspaper is the major source and magazines, sports star etc,

The inputs used are same but outcomes are different, income generated will be more when we use the economies of scope.

Economics Applied 1