What does economies of scale mean?

Tabby Tom

The bigger your operation is, the smaller the unit cost of production tends to be. That's the theory anyway, but people are beginning to recognize 'diseconomies of scale' as well Mar 25 03, 3:26 PM

Linus

By way of an example: If there are two independent companies they each have, say, a payroll department to pay their staff and each has to bear the costs of their own payroll department. However, if the two companies were to merge into one, it could pay all of the combined company's staff through one payroll section which probably would not need to be as big as the combined size of the two original departments. The costs of the new payroll section would be absorbed over a larger production volume, resulting in lower unit costs and hence improved competitiveness. It's not such good news for half of the payroll staff though.... Mar 25 03, 3:46 PM

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