Q. Concept of economies of scale?
Economies of scale refers to the cost advantages that a business attains because of expansion. 'Economies of scale' is a long run concept and alludesto reductions in unit cost as the size of a facility and usage levels of inputs increases. Diseconomies of scale are the opposite. Common sources of economies of scale are labour (division of labour) purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialisation of managers), financial (obtaining low interest loans when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets) and technological (taking advantage of returns to scale in the production function). Each of these factors decreases the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing.