Importance Of Economies Of Scale

Economies of scale refer to economic efficiencies as an outcome of conducting a process on a mass scale. Scale effects come to picture due to the presence of fixed and variable costs in the production process. In other words, ‘Economies of Scale’ or ‘Increasing Returns to Scale’, is a term used by economists to refer to the situation in which the cost of producing an additional unit of output (i.e., the marginal cost) of a product (i.e. a good or service) declines as the quantum of output (i.e., the scale of production) goes up. It could also be defined as the scenario in which an equal percentage increase in all inputs results in a greater percentage rise in output.
It is essential to grasp a thorough understanding of the concept of economies of scale, as they can be a key component in deciding the optimal and equilibrium size of firms and thus the structure of industries, the level of output and their prices. The magnitude of economies of scale depends upon the nature of the industry, i.e. the type of product produced.
Economies of scale can be further classified into internal …show more content…
Before moving ahead, it is important to quickly touch upon the mentioned shortcomings, which if properly addressed may bridge the gulf between diseconomies and economies of scale.
a) Limited access to financial markets: It is observed that majority of SMEs can’t easily access banks, mainly due to presence of high credit risks linked with absence of collateral and high SMEs credit administrative costs. Moreover, lack of reliable and competitive financial services in most of the developing nations, dampens the business competitiveness as cost of funds (interest) becomes sky