The cost advantages that size, output, scale of operation and cost per unit output provide to a particular firm are addressed as economics of scale in the language of microeconomics. Economies of scale apply to a number of organizational and business situations at various levels. This can be applicable for a particular firm or an entire enterprise. Suppose you own a particular power producing firm. Now you are sure to expect a lower per unit cost of output and in order to bring about the lower per unit cost of output, you will have to concern the economies of scale. In order to model economies of scale, the following tips and factors should be kept the best of our knowledge:-
How to Model Economics of Scale
1. Check out the Availability of Resources:-
Modeling the economics of scale is all about checking the availability of resources in order to accelerate the production and to enhance the output. Once you are able to bring about a pre-planned and better usage of available resources with yourself, you can easily accelerate the output production and thus you can reduce the cost of product that you are producing.
2. The More You Give Output, the More you expand:-
True is when someone says,” The more you give output, the more you expand”. By this line we mean that when our output gets increased, we are able to reach more people and we are able to make more sales. Reaching more people means more generation of capital, which can be invested again to accelerate the output furthermore and this proves to expand you further.
3. A One Time Investment is always needed:-
Some people fear while standing in the market and see their product just as the face of profit making. You should be a good investor in order to be able to enhance your output. Every investor and producer has to take a onetime risk making his investments and then investing again from the profits to enhance production output.
4. Making You Understand It with Example:-
Let me make you understand this with the help of an example. Suppose if you and I start up a fruit juice company. The more orders we receive, the more savings we will make and the more savings we make, the more will be our level of re-investment in that particular firm. This will enhance the production and we will reach more people. This will make us capable to reduce the cost of our product as the more we expand, the more we will be able to make relations with the fruit producers, machine providers, preservative sellers and other such people related to our work.
Now, as we will be purchasing more, we will be able to make a bargain on cost of raw material that these people provide us and when we will get raw materials at low prices, we will be able to sell it at low prices and not just our business gets expanded, but also the people connected with us in the form of fruit seller, preservative makers and other such raw material suppliers will also be able to take their business to the next level.
5. Subjected to Limits:-
Modeling the economies of scale is subject to some limits. This includes passing the optimum design point where cost per additional unit begins to increase. This is also subjected to the factors like shipping and delivery and also with the defect rate as the more your product is found defected, the less people prefer to purchase it and this brings about a downfall in both, income as well as production and thus in order to model economies of scale, you need to consider quality before quantity.