Question

Please discuss what economy of scale is all about? why is it important in business and in the country? do some search about it

Answer 1

Answer

Economies of Scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost.

Economy of scale helps businesses to increase their profits because of the following two reasons:

1. It reduces the per-unit fixed cost. As a result of increased production, the fixed cost gets spread over more output than before.
2. It reduces per-unit variable costs. This occurs as the expanded scale of production increases the efficiency of the production process.

Participating in foreign trade is considered an important way to reap advantages of unrealized potential of economies of scale. Usually, foreign trade is based on specialization—each country specializing in production of goods and services in which it has the comparative advantage. With the possibility of the benefits from economies of scale, there are advantages in engaging in specialization and foreign trade even if there is no difference among countries with respect to the economic efficiency with which they produce goods and services.