Economies of scale refer to those advantages that a manufacturing company acquires because of the company’s expansion. Expansion in this case refers to the production size, increased resources and capital and when using the economies of scale, a firm is in a position to reduce its overall costs of unit production. In spite of the advantages that a company obtains from the economies of scale, it still has its limits beyond which a company stops enjoying the advantages. The economies of scale have a number of positive results on the consumers and this affects the demand of the product manufactured by the major companies. This is then attributed to the standard of such goods, which creates the limitation of the consumer’s choices. This then increases the economies of scale, which then results in increase in the market supply and decreased demand, which then causes a decrease in the prices o the goods.
When a company expands beyond its limit and operates beyond its maximum design point, its average cost of unit production increases thus causing diseconomies of scale. These diseconomies of scales are related to internal organization problems and can be quite costly for large manufacturing companies who eventually end up spending more to produce a single unit of the product as compared to smaller manufacturing companies in the same sector. Apart from this, an increase in the unit cost of the natural resources required from the manufacturing process will also cause diseconomies of scale for the business. In establishing the optimal size of a plant, one has to determine the size of the firm and its expected profitability by using accurate cost analysis approaches.
Determining the optimal size of a plant is determined by the size of the firm and its expected profitability using accurate cost analysis approaches.