what are economies of scale 
economies of scale are cost advantages reaped by companies when production becomes efficient companies can achieve economies of scale by increasing production and lowering costs this happens because costs are spread over a larger number of goods costs can be both fixed and variable investopedia mira norianunderstanding economies of scalethe size of the business generally matters when it comes to economies of scale the larger the business the more the cost savings economies of scale can be both internal and external internal economies of scale are based on management decisions while external ones have to do with outside factors internal functions include accounting information technology and marketing which are also considered operational efficiencies and synergies economies of scale are an important concept for any business in any industry and represent the cost savings and competitive advantages larger businesses have over smaller ones most consumers don t understand why a smaller business charges more for a similar product sold by a larger company that s because the cost per unit depends on how much the company produces a company can create a diseconomy of scale when it becomes too large and chases an economy of scale larger companies can produce more by spreading the cost of production over a larger amount of goods an industry may also be able to dictate the cost of a product if several different companies are producing similar goods within that industry there are several reasons why economies of scale give rise to lower per unit costs first specialization of labor and more integrated technology boost production volumes second lower per unit costs can come from bulk orders from suppliers larger advertising buys or lower costs of capital third spreading internal function costs across more units produced and sold helps to reduce costs internal vs external economies of scaleas mentioned above there are two different types of economies of scale internal economies of scale happen when a company cuts costs internally so they re unique to that particular firm this may be the result of the sheer size of a company or because of decisions from the firm s management there are different kinds of internal economies of scale these include larger companies are often able to achieve internal economies of scale lowering their costs and raising their production levels because they can for example buy resources in bulk have a patent or special technology or access more capital external economies of scale on the other hand are achieved because of external factors or factors that affect an entire industry that means no one company controls costs on its own these occur when there is a highly skilled labor pool subsidies and or tax reductions and partnerships and joint ventures anything that can cut down on costs to many companies in a specific industry overcoming limitsmanagement techniques and technology have been focusing on overcoming the limits to economies of scale for decades set up costs are lower due to more flexible technology equipment is priced more closely to match production capacity enabling smaller producers such as steel mini mills and craft brewers to compete more easily outsourcing functional services makes costs more similar across businesses of various sizes these functional services include accounting human resources marketing treasury legal and information technology micro manufacturing hyper local manufacturing and additive manufacturing 3d printing can lower both set up and production costs global trade and logistics have contributed to lower costs regardless of the size of an individual plant according to the international monetary fund the prices of both capital goods and the cost of machinery and equipment have been falling in emerging developed and even industrial countries for the past three decades 1examples of economies of scalejob shops produce products in groups such as shirts with your company logo a significant element of the cost is the setup in job shops larger production runs lower unit costs because the set up costs of designing the logo and creating the silk screen pattern are spread across more shirts in an assembly factory per unit costs are reduced by more seamless technology with robots a restaurant kitchen is often used to illustrate how economies of scale are limited more cooks in a small space get in each other s way in economics charts this has been illustrated with some flavor of a u shaped curve in which the average cost per unit falls and then rises costs rising as production volume grows is termed diseconomies of scale diseconomies of scalediseconomies stem from inefficient managerial or labor policies or over hiring the diseconomies may also be external like a deteriorating transportation network furthermore as a company s scope increases it may have to distribute its goods and services in more dispersed areas this can increase average costs resulting in diseconomies of scale some efficiencies and inefficiencies are location specific if a company has many plants throughout the country they all can benefit from costly inputs such as advertising however efficiencies and inefficiencies can stem from a particular location such as a good or bad climate for farming 