Free «Economies of Scale and Problems with Small Businesses» Essay

Economies of Scale and Problems with Small Businesses

Economies of scale are well described as,Reduction in cost per unit resulting from increased production, experienced through operational efficiencies. Economies of scale can be accomplished because as production increases, the cost of producing each additional unit reduces.In general, a company or a business that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of products.

The initial investment of capital is well spread over an increasing number of units of products, and therefore, the marginal cost of producing a commodity or service is less than the average total cost per unit this mainly happens in the companies or businesses that are experiencing economies of scale on the products or services. There are two types of economies of scale;

  • Internal economies of scale
  • External economies of scale

A company or a business achieves internal economies of scale when a company reduces cost and increases production. External economies of scale take place outside of a company or a business, therefore when an industry's scope of operations expands due to, for example, the creation of a better communication network, resulting in a later reduction in cost for a company working within that industry, external economies of scale are said to have been achieved.

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A small business is described as an individually owed and basically operating on a small number of employees. Problems;

  • Lack of enough capital to maintain the business which would lead to lots of debts and losses other than the major objective of making profits.
  • Lack of qualified personnel in the business whereby the business may not achieve the objected goals of the business.
  • The business may lack good marketing in this case lacking customers due to increase of competition by other same businesses.

Economies of scale may cause profits and losses to companies or business according to types of services and products or to big industries.

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