What are economies of scale?

Economies of scale are those in which the increase in production results in a fall in the average cost of the product.

To increase its production, it is common that the company also has to increase the productive factors used in the process, such as the number of machines and the number of workers. The economy of scale occurs when the cost of this investment grows less than the output resulting from it.

The concept of economies of scale is, therefore, a non-proportional relationship between the average costs of products and the volume of production.

An example of an industry that works with economies of scale is software. In it, the biggest cost is the development of the program. As the cost associated with producing copies of this program is minimal, the increase in production will result in dilution of the development cost, resulting in a lower average cost per product sold.

Internal and external economy of scale.

The meaning of economies of scale, in general, is associated with the internal economy of companies, which have the means to reorganize their production process in order to reduce their costs per unit.

However, the economy of scale can also be external. This happens when, for example, there are changes in the local or regional economy or social changes that are not controlled by the company, but can be used by it. An example is the increase of the transport network, which can increase the flow of products.

Economy of scale

Lack of economies of scale is the reverse of economies of scale. It occurs when the cost of the factors of production increases more than the output resulting from this investment, resulting in an increase in the average cost per unit produced.

An example is when a company that only had one employee who performed a service hires another that thinks about increasing production, but the new employee has a lower productivity than the previous one. In this case, the company doubled its labor cost, but failed to double production.

Difference between economies of scale and economies of scope

The definition of economies of scale considers the relationship between the average cost per unit and the volume produced. Scope savings occur when the reduction in this average cost is due to the joint production of more than one product or service.

In other words, in the economy of scope, if the same company produces two goods together, it will cost less than if two companies produce these two goods separately.

The existence of common raw materials between these two or more products and the complementarity in their production are some of the factors that can generate economies of scope.