The economy of scale concept itself is built around the factor of costs. Firms attain economies of scale when the company are able to minimize their costs or operate at the optimal level of efficiency while keeping the costs as low as possible. This results in the occurrence of low average costs per unit for the product.
Large firms are able to exercise benefits and advantages over the smaller firms by buying in bulk. Often when businesses indulge in prospective buying they tend to buy in bulk. The increased scale of operations increases the amount of funds available for the company. As a result the company is able to indulge in bulk buying. The firm may also receive bulk discounts on their large purchases which reduces the cost of the materials and therefore drives the cost of the process down. Moreover the company can also save on distribution aside from procurement of goods and materials. The saving on the distributing occurs when the company distributes its production and distribution costs over a wider range of products in the product portfolio.
The internal economies of scale that result from the growth of the firm and are relevant to the cost principle are marketing economies, financial economies and network economies. In marketing economies of scale the firm is able to distribute its advertising and marketing expenditures overt a large output whereby bringing the overall promotion and marketing costs down on a marginal scale. The company can even indulge in bulk buying and availing of discounts and negotiating on large procurement orders. This increases the purchasing power of the company relative to its competitors in the market.
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