What Causes Economies of Scale?
1. Spread of Fixed Costs: Such costs are fixed, like facilities, machinery and administrative expenses which do not vary with the level of production. As output grows, these fixed costs are apportioned into a greater quantity of units. Economies of scale occur when spreading fixed costs among a greater volume of production, as doing so diminishes the per unit cost.
2. Specialization and Division of Labor: Large-scale productions enable more specialized role and activities, so workers can become highly specific in certain tasks. Specialization increases efficiency, shortens the time taken on tasks and works to overall productivity in order to generate economies of scale.
3. Technological Advancements: Advanced technologies and automated processes lead to more efficient production, lower labor costs, and simplified procedures. Technological progress helps to raise the level of productivity, reduce variable costs and increase efficiency in general which help making economies scale.
4. Bulk Purchasing: Buying materials such as raw materials or components in bulk enables businesses to negotiate better prices with suppliers. Bulk purchases of inputs reduce per-unit costs, decreasing the overall cost of production and facilitating economies of scale.
5. Learning Curve: The more the repetition of production processes, employees become skilled thus boosting efficiency and reduced cost. Learning curve effect has better performance, lesser error rates and lower training costs that added to economies of scale in time.
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