Scale Economy (definition, advantages and disadvantages)

According to professionals in economic affairs, economy of scale represents a great competitiveness between companies, considering that there are factors that make the average cost of a product per unit, (cost total production divided by units produced) collapses as the scale of production increase.

Definition

The economy of scale It can be defined as the process of achieving significant reductions in unit production costs by taking advantage of growth as it is manufactured in large quantities. Assuming that on a larger scale of production all the fixed costs between the quantity of products and lower unit costs are obtained.

This term is used to refer to long-term production and refers to decreases in unit cost, in In this sense, as the infrastructure of the facilities and production increases, there is a reduction in cost unitary.

Elements that determine the economy of scale

• Acquisition of raw material in large quantities and with long-term contracts.
• Procedures with banking entities that allow financing large expansion projects.

It could be said then that the perception of economies of scale is advantageous when revealing matters concerning transactions international trade, the number of companies that represent a market and the way in which a company becomes gigantic to e unwavering.

They also play an important role as monopoly natural, due to the differentiation of your product by improving your Productive processes, which allows to achieve a greater national and international acceptance of its products.

Characteristics of an economy of scale

Essentially the economy of scale in a logical sense, is characterized by the discount in price per unit, given at the same time that the company expands and manufactures in large quantities.

But that's not all, the economy of scale is also characterized by:

• You get the advantage of experience, thanks to the opportunity to take advantage of advice related to financial management. in order to obtain more capital and to be able to buy more raw material for mass production.
• They achieve a favored position with financial institutions, which see these companies as a business attraction, which is why they access loans under advantageous conditions.
• In addition to being easy to obtain loans from financial institutions, they also achieve support before its suppliers, being able to negotiate solidly through the exchange of services or goods. In addition, this allows for substantial savings in transport and logistics services.
• Infrastructure costs and other fixed expenses are distributed among the bulk of finished products and units sold.
• Costs are reduced, for example, services are contracted that will be used temporarily instead of the purchase of assets or services that can wear out over time and that will not generate any type of benefit for the business.
• Greater is required human resource training in order to achieve greater external and internal competitiveness in order to increase production. Likewise, it is necessary to invest in motivational programs that encourage them to maintain the level of production that is expected to generate greater profitability to the company.
• The expansion of the company depends on the demand for the product, by increasing said demand the expansion is justified, since Faced with low demand, it is not advisable to sell out the company and produce more since there would be losses for non-units. sold.

Advantages of economy of scale

It can be noted then that large-scale production entails advantages related to costs, prices, negotiations and technological investment. In this sense we have:

• The quality of the products is increased. In such a way that if the industry specializes in a certain production area, the quality at the end offered to the consumer has better conditions than those of others of its competition.
• The direct costs.
• Consumer sales prices are lowered.
• Increases the productivity and efficiency in the company, human talent specializes, production becomes more technical, academically the staff specializes.
• The savings achieved can be used to improve infrastructure and technology, which in the long run means greater efficiency in production. That is, everything that is reduced in cost, generates a return that allows you to invest in technology and improve production.
• Likewise, marketing and advertising costs are minimized. Because the expense per unit decreases when large-scale product sales are made.

Disadvantages of the economy of scale

• As it is more expansive in infrastructure and production, controls tend to be greater and therefore there must be greater rigidity in terms of the company's production and functionality regulations. Parameters must be met that allow maintaining the guidelines regarding production, Purchasing Process and supplies, marketing, and this generates little flexibility in the event of an eventual change, in addition to reducing the ability to maneuver in the face of any alternative modification to the organization's structure.
• If it expands uncontrollably, economies of scale can undermine the image of the product or service being sold or provided.
• If there is a sudden change in the use of technology, it could affect the economy of scale, due to to the large capital that would have to be contributed to level or update the modernity of the organization or company.
• It requires an increase in control in all areas of the company, this implies greater hiring of supervisory personnel, greater hiring of external consultants and specialists who provide experience and suggestions that increase the control measures proportional to the expansion of the business.
• It deserves an increase in market research and development. The economy of scale It tends to be more applicable in manufacturing processes than in the provision of services, in such a way that this implies a greater effort in market study.
• Competition with other companies is more difficult.

To conclude, it is important to note that operational efficiency is usually the key to economy of scale. For this reason there are areas where only a large company achieves it, since it implies a large production to lower the price costs.