Suppose, a shoe manufacturing plant produces 100 units of running shoes at $100 per unit. At this level, the cost per shoe remains unchanged. But, cost starts declining with increase in production. This changed cost effect of any product is termed as economies of scale strategy.
Truly, this is very instrumental in the modern world economies of mass production. There, cost effective production strategies scales more than other competitors in terms of handsome profit.
What is mean by economies of scale
Simply, It is a type of production effect or technique to make product cheap and cost effective by large scale production. As a result, in the competitive market, economies of scale is intensively used to capture market power.
For more clarity, whosoever achieve effective economies of scale strategy in a product, capture greater market share. Since, easy market access is only possible with cost effective affordable products.
How economies of scale achieved?
For layman’s understanding, apart from cheaper factors of production, economies of scale is achieved either by internal factors of firm or with the help of external stimulus, especially, help from government. For convenience of specialization, these ways are classified as internal and external economies of scale.
Does economies of scale a product of comparative advantage ?
Yes it is. Comparative advantage offers firm an opportunity to maximise the production of a product in which it holds comparative advantage against its rivals.
In order to have a comparative advantage, a firm should have considerable percent of global market share with healthy demand.
Such market share cannot be guaranteed unless there is free trade system and open economies.
And, we know that open markets and free trade system are major characteristics of rapidly globalizing world.
“In this way, globalization, open markets, free trade system, comparative advantage and economies of scale strategy all are systematically interdependent.”
In other words, we can conclude that comparative advantage and economies of scale cost effect are the positive impacts of modern day free trade system.
How does economies of scale affect modern market?
In the numerous ways, comparative advantage and economies of scale strategy effect drive the present days open markets.
- Cost effective affordable products.
- Consumer satisfaction due to advanced technology.
- Adequate consumers and producers surplus.
- Increase in purchasing power, saving rate and investment.
- Intensive use of scarce natural resources with advanced technology.
- Better tax collection for exchaquer.
- Lower level of negative externality due to intensive use.
These are the advantages of economies of scale strategy. These advantages prove why economies of scale strategy boon for world.