Economies of scale and its types

Economies Of Scale

Economies of scale refer to mean percentage change in average cost of production that arise from increased total output of a product. For example,the cost of producing one unit is less when many units are produced at once.

The graph above plots the long run average costs faced by a firm against its level of output. When the firm expands its output from Q to Q₂, its average cost falls from C to C₁. Thus, the firm can be said to experience economies of scale up to output level Q₂.

There are two type of Econamies scale are-:

1. Internal Econamies of Scale

2. External Econamies of Scale

Internal Economies Of Scale

Internal economies result from the sheer size of the company, no matter what industry it's in or market it sells to. For example If you buy a large quantity, then the average costs will be lower. This is because of lower transport costs and less packaging. This is why supermarkets get lower prices from suppliers than local corner shops.

External Economies Of Scale

A company has external economies of scale if it receives preferential treatment from the government. for example most states will lower taxes to attract large companies since they will provide jobs for their residents. A large real estate developer can often convince a city to build roads and other infrastructure. This saves the developer from paying those costs. Large companies can also take advantage of joint research with universities. This lowers research expenses for these companies.