Economics of Scale concept

Economics of Scale :-

Economics of scale means the percentage change in average cost of production following a 1 percent increase in output.

It occurs when increased output leads to lower unit costs.

Two types of economics of scale :

11.     Internal economics of scale:

  It shows the change in the average production cost and its boost product output. Until the maximum    efficiency is not attained , average cost per unit falls.

22.    External economics of scale :

        External economics of scale basically occur outside of a firm but within an industry. It is an        

        advantage for  the large companies.

      

      Example : Let’s take Telecom tower company ( JIO) sets cost Rs. 1,00,000/- . If they have 10,000 customers from locality near tower, their cost per customer is Rs. 10/-but if they make the services more affordable and acquire 1,00,000 customer, the cost per customer comes down to Rs.1 /- This is probably one of the reason why Reliance Jio is targeting 1 crore customers in the first year at a time when the present no. of 3G users in India is 0.98 crores after all these years.