Economies Of Scale

Economies Of Scale

A business can be either small, medium or large in size.  Many of us are under the impression that a large-sized business is beyond the scope of good control and supervision.  Also, most think that large businesses cannot be run profitably for a longer period.  But there are financial benefits of operating a business on large-scale.  These benefits are known as ‘Economies of scale’.  Let us see the benefits one by one:

Purchase:  Large businesses make a large-scale purchase of raw materials.  Hence better discounts can be bargained easily.  Also, from the supplier’s point of view, a single large buyer will be preferred rather than numerous tiny buyers.

Marketing: Marketing of large business can be done at a low cost easily.  Large business will normally deal in wide range of products.  Hence individual effort for marketing each product is not necessary.  Consolidated marketing efforts at a lower cost can be done for all the products.

Administration:  Large-scale business can hire professional and experts.  They have a proper organizational structure.  Hence supervision can be made effectively.

Research:  Large corporates can afford to incur sizeable amount on research and development.  They can build good infrastructure for a research lab.  For example, a large-scale financial company can afford research on the creation of new apps like bitcoin trader.

Division of labor:  A large activity can be split into various smaller activities.  This is called the division of labor.  Since large firms have a strong labor force, a division of labor is possible.

Low cost of production:  Due to a better bargain in every aspect like purchase, hiring, maintenance, technology etc. the cost of production will be low in large businesses.  Hence, they can earn more profits.

Mechanization: Automation of processes can be easily done in large businesses.  Moreover, the purchase of costly equipment is feasible for a large business.

Low borrowing cost: Since large business houses have a good reputation, they will be preferred by lenders.  Since they repay the loans promptly, banks willingly offer interest concessions.

Creates ancillary industries and helps growth:  Large business support numerous ancillary industries in the surroundings which produce spares and tiny parts which is required by the large business.  This creates numerous employment opportunities.  Thus, large companies are the reason for the growth in an entire region.

Standardization and specialization:  Due to the division of labor, standardization and specialization are possible in every work.  This will result in the improvement of quality, speed, and efficiency.  Hence wastage and loss due to the poor quality of products will not be present.