We explain what scale economy is, its types and the requirements for it to exist. Also, what is diseconomies of scale.
What is economy of scale?
In the microeconomic field, we speak of economy of scale to refer to the productive situation in which An organization manages to produce more products at a lower price for each one. This represents an increase in the benefits obtained and therefore greater productive efficiency, greater capacity for growth and investment.
Generally, this production model occurs when the general costs of a production chain decrease proportionally to the increase in the number of products manufactured per production cycle. That is, the more elements produced, the lower the production cost of each one.
For this to be possible, there must be sources of cost reduction. For example, large-scale purchasing of inventory materials (such as raw materials) lowers the total cost.
On the other hand, long-term contracts, technological or management improvement, the increase in financing sources or the increase in demand thanks to marketing, are factors that reduce the average cost of production in the long term.
Depending on what they are, we can speak of two different types of economies of scale:
- Internal. When the responsible factors are within the company and are the subject of its own administrative capacity.
- External. When the responsible factors are located outside the company and do not depend on its operation.
The concept of economy of scale is extremely useful when thinking about the dynamics of international trade and to understand the reason for the so-called “natural monopolies”.
See also: Microeconomics
Diseconomies of scale
Diseconomies of scale are the complete opposite of economies of scale. They cover the set of forces and factors that lead organizations to obtain losses, due to the increase in the average cost of production of their goods and/or services.
That is, it occurs when The production of a product is more expensive as more units are produced. These types of scenarios and models have been much less studied than their opposite, but like this one, they can depend on internal or external factors of the organization.
Continue with: Cost accounting
References
- “Economy of scale” on Wikipedia.
- “Economies of scale” (video) at Pontificia Universidad Católica del Perú.
- “Economy of scale: definition and types” at OBS Business School of the University of Barcelona (Spain).
- “Economies of scale” in International Economics and Finance from the Pontificia Universidad Católica del Ecuador.
- “Economies of scale and productive efficiency” at EAE Business School.
