Economies Of Scale

Economies of scale or Economy Of Scale is the cost advantage from business expansion.

As some firms grow in size their unit costs begin to fall because of:

  • purchasing economies – large businesses will often receive a discount because they are buying in greater bulk giving their suppliers a corresponding economy of scale.
  • marketing economies – from spreading the fixed costs of promotion and advertising over a larger level of output
  • administrative economies – from spreading the fixed costs of management staff and IT systems over a larger level of output
  • research and development economies – from spreading the fixed costs of developing new or improved products over a larger level of output

There are benefits and drawbacks in increasing the size of operation of a business.

The cost advantage is known as economies of scale – the cost disadvantage is known as diseconomies of scale.