economies of scale

Economy of scale refers to the benefits of producing on a large scale. When firms and industries increase the scale of their operation there can be advantages which reduce the average (unit) cost of their output. Internal economy of scale is the benefit, in the form of lower average costs, which a firm can gain from increasing its size. Internal economies of scale arise from the growth of the firm itself. One internal economy of scale can be marketing economies. For food retail industry, large firms such as Tesco or Sainsbury can save money when they buy raw materials and when they sell their products.

When a firm buys large quantities, often referred to as buying in bulk, it usually pays a lower price for each item. Selling can become cheaper. For example, advertising costs can be spread over more units of output and food packaging and transport costs per unit can also be lower. External economy of scale is the benefit that firm gain in a growing industry. A firm can experience lower average costs either by increasing its size or by being in a growing industry. External economies of scale occur outside of a firm but within an industry.

One external economy of scale for the food retail industry can be good reputation. For example, if an area develops a good reputation, such as Brighton might be famous for delicious fish and seafood, food retail shops or firms producing there, in effect, receive free advertising, leading to more customers coming in. Many of these external benefits depend on firms in the same industry being based in the same area. These are sometimes referred to as economies of concentration.


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