Economies Of Scale Flashcards, test questions and answers
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What is Economies Of Scale?
Economies of scale refer to the cost advantages that a business can enjoy as it expands its operation and production. As a business increases its size, changes in the cost structure occur due to the more efficient use of resources, labour and capital. For example, if a company doubles its output while only increasing its variable costs by 10%, then it has achieved economies of scale a 20% reduction in costs per unit produced. The most common form of economies of scale is purchasing power when companies buy goods in bulk they will often get discounted prices as compared to buying smaller amounts. This allows them to purchase goods at lower cost than their competitors who may be buying smaller quantities. The same concept applies with labour businesses are able to pay lower wages for larger numbers of workers which results in reduced labour costs on the whole. In addition, some industries have natural economies of scale due to the nature of their products or services. For example, airlines benefit from economies of scale because they are able to fill their planes with more passengers than other forms transportation such as trains or buses. Similarly, software companies benefit from scaling up because once an application is developed for one customer it can then be sold multiple times without having to invest additional time and money into development for each individual customer. Economies of scale allow businesses to remain competitive and offer lower prices than their competitors while still maintaining profitability margins necessary for growth and expansion.