Economies of scale
Economies of scale refer to reduced costs per unit that arise from increased total output of a product. There are two types of cost, fixed cost and variable cost. Fixed cost
remain same. It does not depend on output. And variable cost change with the
number of output. Which means when output increase, variable cost also increases
and when output decrease, it will also decrease.
So a company or industry can achieve ‘economies of scale’ by reducing its
fixed cost. The only way to reduce the fixed cost is to increase the production.
There are two types of economies of scale- i) internal economies of
scale and ii) external economies of scale.
Example: Many educational institute start operating in metro cities and industrial
area so that many students can take admission. As a result, their fixed cost
per student will decrease and they will achieve economies of scale.
Diseconomies of scale
From the above discussion we can say that company or business can achieve
economies of scale by growing their business. But when the company or business
grows so large, the cost per unit increase. It is defined as diseconomies of
scale.
Example: Many govt. organisations like BSNL, Air India grew so high,
that they didn’t control their cost. So they face difficulties.
Disclaimer: The definition of ‘Economies of Scale’ were taken from ‘Investopedia’.
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