Economics of Scale (5 Minutes)

This concept refers to the cost advantages that a business obtains due to expansion or collaboration. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Farmer organizations, for example, can leverage this type of advantage. Economies of scale include product specific economies, plant specific economies and firm specific economies.

Product specific economies are related to output of one product which may allow for greater specialization in use of labour and capital.

Plant specific economies are related to total output of one plant (with multiple products).  For example, an investment in a larger pipeline may cost almost the same but have more capacity, or an overhead of one supervisor managing many people, or the use of existing spare parts and personnel on various activities.

Specific economies are related to total output of a firm’s operations from different regions and can benefit from production and distribution from various plants with capacity, discounts and fixed costs for marketing and sales promotions spots, or even technological innovations using in-house resources.