Economies of Scale

433 words | 2 page(s)

Their are a variety of reasons why the country should encourage businesses to expand whenever economies of scale are present. Economies of scale are present when the cost of production is cheaper than the output that is produced. For example, Wal-Mart is able to sell Coke at a lower price because it purchases millions of Coke cans; whereas a local grocery store sells Coke at a higher price, since it purchases fewer Coke cans.

One reason that the country should encourage businesses to expand when economies of scale are present is that it sells the company’s product more widely at a lower cost. For example, IKEA purchases tons of wood each week in order to produce cheap, household products. In contrast, a local carpenter may purchase only a few blocks of wood each week, making his products significantly more expensive. In short: Businesses should expand when economies of scale are present because it reduces the cost for the large scale producer.

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Another reason businesses ought to expand when economies of scale are present is management efficiency. When most of the duties to run a business are placed upon the shoulders of a local business owner, this can can slow production down. For example, a manager of a local restaurant is in charge of the personnel, keeping the books, organizing the marketing, among many other activities. When a business expands, these tasks can be broken into distinct units and assigned to different people. This places less of a burden on the shoulders of the manager, and allows the business to run at a more efficient rate.

The last reason it is wise for businesses to expand is for a technological advantage. Only large businesses can afford to purchase the best technology and machinery available. Small businesses must resort to cheaper, less efficient machinery. This allows large businesses to have a superior product in comparison the smaller businesses. In addition, purchasing the best technology available reduces the amount of cost per unit.

In conclusion, the country should encourage businesses to expand when economies of scale are present in order to produce more materials at a cheaper price, place less burden on the shoulders of businesses owners and purchase the best technology available. Economic growth is marked by expansion. This being the case, businesses are encouraged to loosen their belts in order to fit into this growth.

  • Egelhodd, Tom. “How To Know When To Expand Your Business.” www.smalltownmarketing.com/expanding_your_business (accessed February 6th, 2014).
  • Leddy, Chuck. “Business Opportunities and Risks: Plan Before You Expand Oversees.” http://www.middlemarketcenter.org/business-opportunities-and-risks-plan-before-you-expand-overseas (accessed February 6th, 2014).

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