Question

What is "economies of scale"? Compare the impact of economies of scale on both large and small businesses.

Answer 1

Economies of scale are the advantages that a firm gets when it expands its production .The cost per unit of output will decrease with increase in the scale of production.Thus economies of scale refer to the cost advantage that the firm gets when it increases its scale of operation .Availability of resources at a cheap price which large firms can get, specialization of labour and machines are the reasons which account for economies of scale.Economies of scale are mostly associated with large businesses.

Large sized businesses are the ones which get more benefit from economies of scale.It is the advantage that large firms have over small firms.This is because ,large sized firms have more purchasing power and the advantage of getting more resources at cheap rate.When production expands, the average  cost of producing additional unit decreases with increase in output. Specialisation of labour in large business leads to reduced cost as the specialised workers are efficient and have more knowledge.Moreover the fixed costs of administration etc which the firm has to incur, gets spread as more units are produced.

Small businesses also experience economies of scale as their business expands.Small business can expand their size and experience the benefit of cost reduction with increased output.Small businesses can expand by introducing division of labour, specialisation , negotiate with suppliers for low price,increase the  welfare of the workers  to increase output,start product diversification etc