A Full Guide to Economies of Scale: Types and Examples
Even if someone is not studying economics, they are supposed to learn about economics. People who are working for the company should know the economies of scale too. The meaning of it is the advantage in terms of finances that the company obtains when the production division is managed properly and efficiently. The efficiency allows companies to develop production at lower costs and based on increasing commercial demand. However, there are a lot of variables that can be controlled to achieve efficient production. We will explain this topic in detail below.
The Detail Definition
The development of companies depends on economies of scale. That is why the whole staff at companies understands this term. National companies need to save more money than local companies. Likewise, international companies have to save more money than domestic companies. This is important because those international companies produce more products. The more products, the more costs are incurred. This kind of factor really depends on good management, raw materials, and production techniques.
Every department in a company should synergize in a good way to lower costs. It means the marketing, information technology, and production divisions must understand how to cut costs. The fact is, smaller companies spend more than big companies due to more expensive raw materials. In fact, they sell it to compete with products from big companies. Big companies have the ability to buy wholesale raw materials. Wholesale raw materials have lower purchase prices than normal raw materials. The cost of raw materials also depends on negotiations between the company and suppliers.
Types of Economies of Scale
The next step is to know its type. There are two types: internal and external scale. The definition of those types can be seen below.
1. Internal Scale
This type of economy of scale includes production and management. The two activities of the division affect how the company functions. Not surprisingly, companies choose to hire experienced managers and operators. Both types of employees will greatly affect efficiency costs.
2. External Scale
There are also external factors that affect companies. The companies should spend the money because they cannot control this one factor. Examples of the costs are taxes, partnerships, and so on. If the government decides to increase taxes on the industrial world, companies must pay taxes according to these regulations. This also applies to partnership prices.
You should know the limitations of economies of scale
If we talk about this topic, then it will cover things that are too broad. The management division should focus on the limitations. The manager should apply flexible technology due to its lower cost. The company is better off using flexible equipment too, so that it can be used to produce at lower production capacities. This kind of equipment allows the company to survive when it has to face a temporary decrease in demand.
Meanwhile, other divisions within the companies apply service costs that are similar to those of other companies. Several divisions that fall into these categories are HRD, accounting, legal, IT, and treasury.
