When the size of production increases considerably, the given product becomes more cheaper due to efficient use of resources. And, the given cost advantage makes the product more competitive in the market. But, to be or remain in such effect, firm or actor need better market share. First of all, let’s know the importance and examples of economies of scale and mass production relation in detail.
Example to know what does economies of scale (EOS) mean
Suppose, a shoe manufacturing plant produces 100 units of running shoes at $100 per unit. At this level, the cost per shoe remains unchanged. But, cost starts declining with increase in production due to better efficiency. This changed cost effect of any product is termed as EOS strategy.
Beyond doubt, this is very instrumental in the modern world economies where mass production is valued to compete in the open market competition. There, cost effective production strategies offers extra edge than other competitors in terms of handsome profit and brand value.
Understanding economies of scale (EOS) and mass production relationship
Simply, It is a type of production effect or technique to make product cheap and cost effective by large scale production. Consequently, in the competitive market, EOS is intensively used to capture market power.
For more clarity, whosoever achieve effective EOS strategy in a product, capture greater market share. Since, easy market access is only possible with cost effective affordable products.
Stages or Types of economies of scale
For layman’s understanding, apart from cheaper factors of production, economies of scale is achieved either by internal factors of firm or with the help of external stimulus, especially, help from government. For convenience of specialization, these ways are classified as internal and external EOS.
Relations between economies of scale and comparative advantage
Yes, there is strong relationship between comparative advantage and economies of scale. Comparative advantage offers firm an opportunity to maximise the production of a product in which it holds comparative advantage against its rivals.
In order to have a comparative advantage, a firm should have considerable percent of global market share with healthy demand.
Such market share cannot be guaranteed unless there is free trade system and open economies.
And, we know that open markets and free trade system are major characteristics of rapidly globalizing world. “In this way, globalization, open markets, free trade system, comparative advantage and EOS strategy all are systematically interdependent.”
In other words, we can conclude that comparative advantage and EOS cost effect are the positive impacts of modern day free trade system. Here, In the process of understanding importance and examples of EOS, so far we have learnt examples. Now, hereafter, let’s know the importance of EOS.
Importance and impacts of economies of scale
In the numerous ways, comparative advantage and economies of scale strategy effect drive the present days open markets. Let’s see the importance of economies of scale production strategy.
- Cost effective affordable products.
- Consumer satisfaction due to advanced technology.
- Adequate consumers and producers surplus.
- Increase in purchasing power, saving rate and investment.
- Intensive use of scarce natural resources with advanced technology.
- Better tax collection for exchaquer.
- Lower level of negative externality due to intensive use.
These are the advantages of economies of scale strategy firm with mass production could reap. These advantages prove why EOS strategy boon for the world with competitive markets.
This is all about the economies of scale and mass production relationship in modern industry.
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