Economies Of Scale

Definition of "Economies of scale"

Written by

Clifton James

Weichert Realtors

The most common definition of economies of scale refers to the decrease in production costs of a single item due to a business enterprise’s expansion. In short, mass production can result in expense optimization.

Construction sites apply economies of scale.

The meaning of economies of scale applies to the situation in which the average cost of construction declines as building size and volume is expanded. Specialists explain this phenomenon with increased specialization, better use, and division of labor. Besides, they can benefit from more efficient or high-tech building equipment.

Commercial real estate and economies of scale

Opinions vary whether one can obtain economies of scale in a commercial property lease. Nay-sayers argue that applying the economies of scale formula to leasing rental units in commercial areas is counter-productive because it fragments your business. 

In a nutshell, the more property you rent out, the more problems and lease terms you will have to oversee. As a commercial building owner, you don’t have the proper resources to deal with issues. For this reason, they recommend upscaling your business in one location.

According to the more positive approach, continuing operation costs are standard, such as office space maintenance fees and personnel. For this reason, a commercial real estate investor must add properties to their portfolio to ‘swallow’ these costs and to accomplish economies of scale. Besides, hiring additional staff to manage responsibilities effectively coming with new leased commercial buildings.

Contact local real estate agents if you wish to enjoy the benefits of economies of scale as a real estate representative!

Economies of scale are a company’s criteria of success.

Typically, companies can attain economies of scale, also known as cost benefits, as soon as their production becomes effective. Efficiency implies that they succeeded in boosting their production, manufacturing goods, and providing services, all maintained at reduced costs. 

They achieve this by spreading general costs, both variable and fixed, over a substantial quantity of products. Subsequently, reaching economies of scale is a company’s ultimate objective because it implies significant cost savings and increased production capability.

Explore various types of economies of scale!

We separate internal and external economies of scale based on various resources to achieve financial success.

Internal economies of scale

We call a company’s internal economies that are one-of-a-kind. For instance, the firm retains a patent for the bulk production of a gadget. This copyright on their invention enables them to cut down their average ‘household’ costs and production expenses per unit more than their business competition. 

In other cases, they achieve economies of scale due to their sheer size. In addition, they can buy materials, goods, and resources on a large scale. For sure, a significant amount of already available capital and unique technology can help them obtain even more profit.

External economies of scale

As opposed to the previous resources, external economies are typical in the industry, and every company has access to them. Let’s suppose the government intends to increase iron production. Companies hiring more than 5,000 employees will receive a 25 percent tax break for motivation. Therefore, iron manufacturers with fewer than 5,000 can now optimize their profit and reach economies of scale by hiring extra employees. 

Every economic sector can benefit from the same advantages. Besides tax reductions, a company can accomplish economies of scale by focusing its attention on hiring a skilled labor force and applying for subsidies. All these would contribute to production costs decreasing. Besides, companies in particular industries can all gain access to them.