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Economies of scale is related to and can easily be confused with the theoretical economic notion of returns to scale. Where economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function.
However, the average cost in an L-shaped curve may further decrease even though most economies of scale have been exploited when firms achieve the MES because of technical and production economies. For instance, the firm may obtain further economies of scale from skill improvement by training the employees, decentralization in management.
This strategy can enable companies to increase their market share and achieve economies of scale by leveraging existing resources and capabilities. [ 22 ] Internal expansion through horizontal integration can also involve the integration of different business functions, such as production, marketing, and sales, to streamline operations and ...
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Related to vertical expansion is lateral expansion, which is the growth of a business enterprise through the acquisition of similar firms, in the hope of achieving economies of scale. Vertical expansion is also known as a vertical acquisition. Vertical expansion or acquisitions can also be used to increase sales and to gain market power.
It is a break from previous firms’ development models which advocated growth at first to achieve economies of scale and then profitability (see BCG Growth-share matrix). A study by Davidsson et al. (2009) found that small and medium-sized firms (SMEs) are much more likely to get a position of high growth AND high profitability starting from ...
These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e. the firm hopes to take advantage of economies of scale and experience curve effects. For industrial firms, mass production becomes both a strategy and an end in itself.
Firms combine labour and capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than individual market trading. In perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price.