What are the various sources of economies of scale?
Answers
when more units of a good or a service can be produced on a larger scale, yet with fewer input costs,economies of scales are said to be achieved. Alternatively, this means that as a company grows and producting units increase, a company will have a better chance to decrease its costs. According to this theory, economic growth may be achieved when economies of scale are realized.
1. Sources of internal economies
• Mass production through manufacturing capability improved by process improvements or application of technology and innovation
• Discounts received from bulk purchases of supplies or raw materials used as inputs in production or from special agreements with suppliers
• Multiple production or delivery of different goods or services using similar production processes resulting in higher collective output and profitability
• Specialization of tasks made possible from financial capability used in hiring a larger workforce or using better tools resulting in better productivity
• Spreading the fixed cost association in the management or administration of an organization across a higher level of output or large production volume
• Inexpensive or cost efficiency advertising and marketing expenditures relative to profits from high profitability from large production volume
2. Sources of external economies
• Expansion of an industry or sector leading to an increase in marginal returns although involved organizations individual produce under constant returns to scale
• Government intervention such as tax breaks or discounts to attract organization, thus resulting in lesser cost in doing business to a particular location
• Effective transportation networks that make the movement of supplies or distribution of outputs time and cost effective and efficient
• Availability of highly competent individuals in the labor market of a particular location, thus leading to lower hiring and retention cost
• Geographic locations with favorable characteristics such as transportation networks, competent labor market, and infrastructures or public services