Economies of scale

We call economies of scale the phenomenon when the more we produce of a product, the lower the cost per piece. Economies of scale are present almost everywhere in the economy, but they are particularly important in certain areas.

Economies of scale are one of the concepts that best explain the functioning of modern economies. It means that the larger series of products we produce, the lower the cost per product will be. But economies of scale are a phenomenon that exists not only in production, but also in services and trade. To support this statement, it is enough to think that the big commercial chains are able to offer products at a good price because they buy them in large quantities, so they also get big discounts. 

The development of economies of scale is natural because they exist in almost all products, but also in services variable and fixed costs. Variable costs are those that increase with the number of products produced, such as the raw material incorporated in the product. Important variable costs for a baker are the price of flour and electricity. 

Fixed costs, on the other hand, do not increase in proportion to the quantity of the finished product, such is the oven in the case of the baker. A typical fixed cost is a our site rent, which only increases if the company does very well and expands the area. (Of course, it can also rise for real estate market reasons, but that's a different matter.) It is clear that the more fixed costs are distributed among products, the less is available per piece, i.e. as the series sizes increase, the production cost of the product decreases. 

Of course, economies of scale do not grow indefinitely either. There are many limits to cost reduction, such as the capacity of the oven for the baker. However, the most important limitation is the market limitation, namely the constraint that the produced product or offered service must also be sold. If this fails, then the big plan will go up in smoke, and the cost of the products left on our necks will have to be borne by those who sold them. 

Economies of scale as a consideration are therefore always the expansion and the market acquisition pushes businesses in the direction. However, this can be hindered by transport costs, which are new and new points of distribution the investment cost of its creation, or even the customs duties. With all this, it is undoubtedly true that economies of scale are one of the main reasons and an important pillar of international trade.

All this sounds very good at a time when our company has already come a long way on the path of economies of scale, but looking at it from another angle, it raises the monopolies possibility of formation. Those who produce many products can sell them cheaply, since the cost per product is small. The start-up business however, it cannot begin its operations by producing and selling such large series, as it would require an impossibly large investment on its part. The economies of scale are therefore severe market entry barrier means for start-up businesses, for which it is mostly a cure innovation can bring.