What is Economies of Scale? Explain the various Economies of Scale.
Economies of scale refer to the perception of increasing efficiencies of the production of goods as the number of goods being produced increases. In other words it refers to the decrease in the average costs of producing goods, with every additional unit as the fixed costs are spread over the increasing number of goods produced. In simple words the economies of scale occur when there is an increase in output as cost decreases, which means that the firm may look forward to decreasing its cost. Also since all the inputs tend to be variable in the long run, it is through the economies and dis-economies of scale that U-shape of the LRAC is based on.
There are two ways of achieving economies of scales namely:
- Internal economies of scale.
- External economies of scale.
Basically the internal economies of scale occur due to the change in the output of an individual firm and are not dependent on the industry as a whole. This cane be achieved in two ways that is through firm level and the plant level. On the other hand the external economies of scale occur due to a growth in the industry as a whole. The individual firms need not grow, however the entire industry around thew does.
The economies of scale and dis-economies of scale are usually known as the internal economies and internal dis-economies of scale. As the changes in the long run average cost are only dependent on the adjustments of output in the individual firms. The external economies do also provide assistance in reducing the production costs. Some firms tend to work on the waste materials and the by products due to the expansion of the industry as a whole. On the other hand there .might be some firms may come up for supplying raw materials, tools, etc. It can thus be said that the expansion of the industry benefits the firms, though the firm may not be responsible for the benefits being raised. The cost-output elasticity is a way to measure the economies of scale. It is referred to as the percentage change in the average cost of production resulting from a one percentage increase in output.
[img alt_text=’economies of scale’ description=”]https://cdn.owlgen.com/wp-content/uploads/2019/10/economies-of-scale-min.png[/img]
Thus on the basis of the above equation it can be said that Ec is equal to one when the marginal cost is equal to the average cost.