Economies of Scale means that if one percentage
increase in output is noted, by how much percentage the Average Cost of production drops. This characteristics Economies of
Scale is shown by companies and businesses who have long term life. A company in long run will be in a position to
decrease its cost for producing more units of a commodity and hence the company
is in a position to grow better.
This
Economies of Scale has two aspects: -
· Internal Economies of Scale.
· External Economies of Scale.
Internal Economies of Scale is when a company or a firm shows
the characteristics of Economies of Scale. That is when the cost of production
decreases with increase in population of a particular company. For Example, D
Mart operates with the characteristics of Economies of Scale. As the company is
running in long run, the average cost of company falls with the increase in
production.
External Economies of Scale is with an industry and not a
particular firm or a company. This happens outside a company, in an industry
where all the firms or the companies are benefitted. For Example, Banking Industry.
When a bank operates it thinks of maximizing profit, they give credit and ATM facilities.
With opening of more ATM branches and bank branches, the industry grows and in
turn all the banks gets the edge.
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