Economy of Scale

When a company’s increasing production of goods leads to higher efficiency, it is known as an economy of scale. For example, Company A’s cost per unit of output may be $1 when it produces 500 units, but $0.9 when it produces 1000 units.  This can lower the average cost of goods, making the company’s products cheaper than its competitors and  increasing its competitiveness. Large firms like Standard Oil were able to force  most of their competitors out of business due to their economies of scale allowing them to produce and provide goods at a much lower price than their competitors.

An important advantage a large, well-established blue chip has over a new upstart in the industry may be its economies of scale. (However, this does not apply to all industries.)

However, after a certain point, an increase in the size of production may lead to lower efficiency as the increasing bureaucracy needed to manage the production may decrease efficiency.

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