economies of scale

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Economies Of Scale

Priyanka Yadav

MBA 1 Sem

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Economics :

Economics is the study of how people choose to use resources.

1. Time and Talent people have available,2. The land, building, equipment, and other tools on hand and3. The knowledge of how to combine them to create useful products and services.

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Scale:Pattern, Set, Measure, or Estimate according tosome rate or standard. Or The proportion between two sets of Dimensions.

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Internal and External Economies of Scale

Internal : When a company reduces costs and increases production, 

External : occur outside of a firm, within an industry. 

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For example: McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production. 

Example of Economies of Scale

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Why It Matters ?When a company can effectively scale its business and cut costs on a per-unit basis, this often gives it the flexibility to:

Drop its prices Charge the same amount and pocket a higher profit

Or some combination of two

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Is Bigger Really Better? As businesses get bigger, the balance of power between demand and supply could become weaker, thus putting the company out of touch with the needs of its consumers. Moreover, it is feared that competition could virtually disappear as large companies begin to integrate and the monopolies created focus on making a buck rather than thinking of the consumer when determining price.

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Conclusion

The key to understanding ES and DS is that the sources vary. A company needs to determine the net effect of its decisions affecting its efficiency, and not just focus on one particular source. Thus, while a decision to increase its scale of operations may result in decreasing the average cost of inputs (volume discounts), it could also give rise to diseconomies of scale if its subsequently widened distribution network is inefficient because not enough transport trucks were invested in as well. Thus, when making a strategic decision to expand, companies need to balance the effects of different sources of ES and DS so that the average cost of all decisions made is lower, resulting in greater efficiency all around. 

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Thank You !