Economies of Scale

Wikipedia defines economies of scale as

"The cost advantages that a firm obtains due to expansion...Economies of scale may be utilized by any size firm expanding its scale of operation. The common ones are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), and marketing (spreading the cost of advertising over a greater range of output in media markets). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right.

The article goes on to say, "There are two typical ways to achieve economies of scale: (1) high fixed cost and constant marginal cost and (2)low or no fixed cost and declining marginal cost."

If you want read more, go to Wikipedia and follow their links. It talks about diseconomies of scale, economies of scope, ideal firm size, returns to scale, and the long tail. Knowing the extent to which one can achieve economies of scale will help an entrepreur judge how far or how fast to expand his business and how much to partner with others in the market to gain better results.

Do you have a reaction to this or anything else in this blog? If so, post a comment.

Everything I do is entrepreneurial. For Real Estate 2.0, go to www.yourstopforrealestate.com/blog; for publishing 2.0, go to www.kearneymusicschoolmurders.blogspot.com.