Economies of scale refer to the cost advantages that companies experience when they increase production and become more efficient. As a result, costs can be spread over a larger amount of goods, leading to lower unit costs. There are many different types and examples of how firms can benefit from economies of scale, including specialisation, bulk buying, marketing, risk bearing, and more .
One example of economies of scale is tap water. Water companies had to invest in a huge network of water pipes stretching throughout the country to produce tap water. The fixed cost of this investment is very high. However, since they distribute water to over 25 million households, it brings the average cost down. However, if another water company were to build another network of water pipes to compete with the existing company, it would not be worth it because if they only got a small share of the market, the average cost would be very high and they would go out of business .
Another example of economies of scale is car production. The production process involves many different complex stages. Therefore, to produce a car, you should split up the process and have workers specialize in producing a certain part. For example, a worker may become highly specialized in the design of a car, another in testing, etc. Specialization requires less training of workers and a more efficient production process. However, if you have several distinct production processes, it is most efficient to have a large output .
upermarkets can benefit from economies of scale because they can buy food in bulk and get lower average costs. If you had a delivery of just 100 cartons of milk, the average cost is quite high. The marginal cost of delivering 10,000 cartons is quite low. You still need to pay only one driver; the fuel costs will be similar. True, you may need a bigger van, but the average cost of transporting 10,000 is going to be a lot less than transporting 100 .
To develop new drugs to treat illness takes considerable degrees of investment and research with no guarantee of success. Therefore, this can only be undertaken by pharmaceutical companies with significant resources. Major pharmaceutical companies, such as Novartis, Pfizer Inc, and GlaxoSmithKline Plc, all undertake significant research in developing new drugs .
Another example of economies of scale is container principle. More efficient transport and packaging with bigger containers. If the surface area of a container increases by 100%, the volume it can carry will increase by 200% .