Question

Explain the concept of 'Economies of Scale' and provided two specific benefits companies usual gain through this.

Answer 1

Economies of scale are a production-related concept which helps the companies to reduce the expenses that are incurred while producing the units of the product. Economies of scale are the strategy adopted by the companies to reduce the expenses that are incurred while production by producing a large number of units of the product at the same time. Sometimes management plans to adopt the production strategy of economies of scale to lower the price of their products; however, when the size of a firm increases and demand for their products also increases, then they automatically have to increase the scale of producing their goods.

Most large firms that have more customers and have to produce more units of their product adopt economies of scale, and the small firms are not able to produce their units on a large scale because of the shortage of resources and funds required for producing a large number of units. That is why the price and quality of products from big firms are better than that of small firms.

The benefits that the companies gain through economies of scale are:

• Advantage of cost of each unit: producing good in bulk helps the firms to reduce the price that the firms have to charge from the customers for each unit of the product as all the expenses that the firms incur on a single unit of the product reduce when a large number of units of the product is produced at the same time.
• Standardized goods: as in economies of scale, large numbers of units are produced together rather one by one, the standard of every unit can be maintained, and unnecessary differences in different units of the product can be eliminated.