What are some advantages of economies of scale?
Quick Answer
The most significant advantage of achieving economies of scale is a reduced cost per unit of production. Most other advantages stem from this primary benefit. A lower cost per unit allows a business to earn greater profit even when maintaining a similar price point. The company could pass on cost savings to customers by operating with a low-price strategy.
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Full Answer
Efficient production allows a business to plan for buying supplies and inventory. An efficient producer can often purchase supplies in bulk, which leads to lower costs of goods sold and lower supply expenses.
Having economies of scale creates a virtual snowball effect, as companies that operate efficiently have a better ability to invest in advanced technology and new equipment. In contrast, competitors with higher unit costs take longer to generate the profit necessary to make such investments.
One significant indirect advantage is that companies with efficient economies can often afford to investment in other important business activities, such as marketing. Effective marketing also contributes to economies of scale, because attracting new customers and selling higher amounts of products allows for greater purchasing and production power.
Companies with economies of scale are also in a more favorable position to donate products to social organizations and nonprofits, which helps maintain goodwill.
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