In any economy there exist a myriad of organization which differs in their size, orientation, and their organization culture. No organization can be said as being better than the other as they all operate in different environments and with different priorities. However it has been established that large firms are usually much better than smaller ones when it comes to operating on a large scale and driving own costs. The reason for the large companies being more efficient in terms of cost reduction is due to the phenomenon of economies of scale.
Economies of scale occur for large organizations. In economies of scale the production process expands in scope and volume resulting in similar level of fixed costs being distributed over increasing number of products produced. The variable costs are the same and as a result the overall costs reduce with the production of every additional unit. Economies of scale provide large organizations with efficiency and cost benefits.
The concept behind the economies of scale is that when the organizations increase their level of production they end up increasing their variable cost in accordance with the number of units produced. However the fixed costs remain the same. As a result in the short run the company ends up facing higher costs in the initial stages but in the longer run the cost of the operations is optimized with the reallocation of resources as well as specialization. The marginal cost of producing a product reduces whereby resulting in the cost curve to average out and the concept of economies of scale taking place.
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