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The scale effect in the economy – in simple words

The scale effect in the economy – in simple words

Well, first of all, the very concept of "scale effect" simply says that there is some effect from some scale.

In any commercial environment, the economic evaluation of the effectiveness of a product/service is always based on the cost or costs of its production.

The lower the cost (cost) per unit of product/service, the greater the profit from it and the higher the price competitiveness. I.e., in highly competitive conditions, there is a margin of safety in reducing the price due to cost and at the same time maintaining profit.

In economics the unit cost of products is always formed from variable and fixed costs.

If variable costs per unit of production do not depend on the volume of production, then fixed (overhead) always and directly depend on them.

The higher the production volume, the lower the unit costs. And this effect is achieved precisely due to the scale of output (production) of products/services.

This is exactly the essence of this concept –scale effect.

That is, we increase the scale (production volume), thereby reducing the constant unit costs, which in general allows you to reduce the entire unit cost.

'scale effect in economy in simple words on example - 1

The goal of the scale effect is to reduce costs per unit output.

Due to the economies of scale, it is always possible to achieve a reduction in the cost of a unit of production, but only if there is a constant component (overhead costs) in its composition.

For example, imagine a situation where there are no overhead costs in production activities. I.e. costs grow in proportion to volume and in this case there is no scale effect - with an increase in production volumes, unit costs will not decrease.

'scale effect in economy in simple words on example - 2

From here we can conclude:

The higher the share of overhead costs (fixed) in the organization's costs, the higher the scale effect - with each additional unit of production, the costs of all units will decrease at a high rate.

Similarly, the scale effect directly affects break-even level organizations, on the basis of which the volume of output of products/services is determined, providing zero economic result of profit/loss activities.

There are situations when the growth of production volumes can not only increase the total profit of the organization, but also the loss.

'scale effect in economics in simple words on the example - 3

The scale effect gives its economic result in the form of an increase in the total profit of the organization only if there is marginality per unit of production (Unit price – Variables ed. = +), i.e. margin profit.

Therefore, from an economic point of view, this indicator should always be considered in conjunction with the marginality of the product.

Hence, there is a need in economics to calculate the break-even point of products as a fundamental criterion efficiency is precisely due to the economies of scale.

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