Economies of scale dealing with cost saving

Economies of scale dealing with cost saving

When we generally talk about any business enterprise and its point of view towards its business, we encounter the most common necessity for them, i.e. profit maximization. One more non neglected and crucial point of concern remains the cost cutting of the produce of that company. Mostly, we get to see a strategy by most of the big multinational companies and enterprises is that when it comes to their cost cutting as a consent, they tend to maximize the production of the goods to reduce their overall cost. This phenomenon is a something that actually defers the bigger enterprises from the smaller ones. Let us further decipher the meaning of this phenomenon.

ECONOMIES OF SCALE: This can be defined as a work in the business where if the increase in the output or production of the goods is practiced, there is a radical decrease in the cost rates of the overall production due to the increase in the production behaviour.

This process can further be divided into 2 more broad categories:

Internal factors: These factors are comprised within the organisation are based on the intra-organisational activities.

External factors: These factors comprise of the major external causes which are outside the organisation and are based on the inter-organisational activities or based upon the controlling bodies of all the organisations existing in the market.

To understand this through examples and if I take an example of my own experience, when I went to purchase 1 kg of tomato, I had to purchase it at the cost of Rs 20 for 1 kg. Whereas, when my college mess procurement staff went to purchase the same product from the same vendor, and the difference was he had gone to purchase 15 kg of tomatoes, it costed him around Rs 12 per kg due to the increase of the quantity to purchase. This clearly signifies the "economies of scale" under process.