What Is Meant By Economies Of Scale?

If a firm gets cost advantage because of expansion, then it is known as economies of scale. The opposite term for economies of scale, is diseconomies of scale. This scale can be used by any firm in any industry when it expands its operations. For example, expansion of the purchasing operations like buying long term contract, managerial expansion like enhancing the skills of the managers, financial expansion like accessing major financing instruments, and expansion of marketing operations. As a result of change in any of these factors, there is a change in the average cost incurred by the company. Therefore, long run average cost is decreased by pushing down the short run cost. A very simple definition of economies of scale is the point where the firm is producing maximum output in minimum cost. Please view the picture which will give you the better understanding.

The phrase "economies of scale" describes a situation in which it is cheaper for a company to produce a product in larger volume than in smaller volume. As the number of units produced increases, the cost per unit goes down.

The phrase is often used to describe the potential efficiency savings that might result from the merger of two formerly separate companies.

It is also often used when discussing the competitiveness of the companies in different countries. Some economists believe that having a large domestic market offers companies an advantage when they come to compete internationally because the economies of scale they realise in their home market allow them to shave expenses from their production costs which then allow them to succeed beyond their own borders. The United States is usually cited as one of the prime examples of this phenomenon. Although, the population of Europe is larger, its economies have been fragmented by trade and language barriers, thus making it more difficult for continent-wide mega-corporations to develop.