What is economy of scale?

The definition of economies of scale is the situation in which a company decreases its operating expensesgrowing up. In this case, the more quantity produced, the cost of manufacturing the products will be lower for the company.

By producing in large quantities or on a large scale, fixed costs are reduced. For example, if a company purchases a machine for the manufacture of furniture, the more items it sells, the less money it will cost to finance it and the more profit they will make. If, on the other hand, machinery is invested and little is sold, the fixed cost will be maintained but not the profits.

As soon as the cost of acquiring the machines is covered, production will begin at zero cost, since it will be amortized. This is so because the money that was spent will have been earned. From there, the profit will be higher because the manufacturing expense will not have to be deducted from the profits.

The concept of economies of scale provides a greater advantage to companies when investing in machinery, since they can produce large quantities and reduce costs.

Therefore, the reduction in the unit manufacturing cost will not be diminished by the reduction in the price of the materials, but to make profitable a material that you already have in your possession and for which you invested in the past.

Types of economies of scale

The economy of scale can be classified into two types:

  • Internal: they appear within the company itself.
  • External: arise from external factors.

The reduction in the cost of manufacturing economies of scale has a limit. When reaching a certain size and although the economy of scale facilitates fixed costs lower, it will also be more difficult to manage a large company due to its need for coordination.

Know the difference between economies of scale and economías del alcanceand what each is used for.

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