Economy of Scale: A Comprehensive Guide to Cost Efficiency in Business
Definition & Meaning
Economy of scale refers to the cost advantages that a business experiences when it increases its production levels. As a company produces more goods or services, the cost per unit typically decreases. This phenomenon can be categorized into two main types:
- Internal economies of scale: These occur when the cost per unit decreases due to the growth of the individual firm.
- External economies of scale: These arise when the cost per unit is influenced by the overall size of the industry rather than the specific firm.
Legal Use & context
In legal contexts, the term economy of scale is often discussed in relation to investment funds and mutual funds. It is particularly relevant under the Investment Company Act of 1940, which governs how mutual funds operate. The concept is significant in cases where plaintiffs must demonstrate that a fund's operational costs decrease as its size increases, thus affecting fees charged to investors. Users may find relevant legal forms and templates through US Legal Forms to assist in navigating these issues.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A manufacturing company that produces 1,000 widgets may find that its cost per widget is $10. However, if it increases production to 10,000 widgets, the cost per widget may drop to $7 due to more efficient use of resources.
Example 2: A mutual fund that grows from $100 million to $1 billion in assets may experience a reduction in its operational costs per transaction, allowing it to offer lower fees to its investors. (hypothetical example)
Relevant laws & statutes
The concept of economy of scale is primarily referenced in the Investment Company Act of 1940, which regulates mutual funds and their fee structures. The act outlines the responsibilities of fund advisers regarding the sharing of cost savings with investors.