Solutional new logo (1)

Economies of scale

Deel dit
" Terug naar Woordenlijst Index

Economies of scale is a term used to describe the increased efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production because fixed costs are shared over an increased number of goods. Factors contributing to economies of scale include purchasing (bulk buying of materials through long-term contracts), managerial (increased specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising[1] over a greater range of output), and technological (taking advantage of the inverse relationship between the capital cost of the equipment and its size). It’s important to note that economies of scale can also be enjoyed externally, for example, through the growth of an industry within a specific geographical area.

Terms definitions
1. advertising. Advertising is a form of communication used to inform or persuade an audience, often with the goal of selling a product or service. Its history dates back to ancient civilizations, where Egyptians used papyrus for sales messages, and wall paintings were used in ancient Asia, Africa, and South America for promotional purposes. The medium evolved over time, from print in newspapers to audio-visual and digital mediums, with the rise of mass media and technological advancements. Advertising strategies can vary, aiming to raise awareness or drive sales, and can target different audiences on a local, national, or global scale. Various methods include print, radio, web banners, and television ads, among others. New trends have emerged in the advertising business models, like guerrilla marketing and interactive ads. The role of women in advertising has also been notable, with their insights being valued due to their purchasing power.
Economies of scale (Wikipedia)

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables an increase in scale. At the basis of economies of scale, there may be technical, statistical, organizational or related factors to the degree of market control.

As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. LRAC is the long-run average cost.

Economies of scale arise in a variety of organizational and business situations and at various levels, such as a production, plant or an entire enterprise. When average costs start falling as output increases, then economies of scale occur. Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial equipment, have a physical or engineering basis. The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale are the opposite.

Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper industry. A common limit for a low cost per unit weight commodities is saturating the regional market, thus having to ship products uneconomic distances. Other limits include using energy less efficiently or having a higher defect rate.

Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently. They will, therefore, avoid specialty grades even though they have higher margins. Often smaller (usually older) manufacturing facilities remain viable by changing from commodity-grade production to specialty products. Economies of scale must be distinguished from economies stemming from an increase in the production of a given plant. When a plant is used below its optimal production capacity, increases in its degree of utilization bring about decreases in the total average cost of production. Nicholas Georgescu-Roegen (1966) and Nicholas Kaldor (1972) both argue that these economies should not be treated as economies of scale.


" Terug naar Woordenlijst Index
nl_BENL
Scroll naar boven