Efficient Scale

Published Dec 26, 2022

Definition of Efficient Scale

Efficient Scale is defined as the optimal size of a business or organization that maximizes its efficiency and profitability. That means it is the size at which the average cost of producing a good or service is minimized.

Example

To illustrate this, let’s look at an imaginary factory that produces widgets. The factory has 10 employees and produces 10,000 widgets per month. The average cost of producing each widget is USD 1.00. Now, the factory decides to hire 10 more employees and increase its production to 20,000 widgets per month. However, due to the additional costs of hiring and training the new employees, the average cost of producing each widget increases to USD 1.20. Thus, the factory is at a more efficient scale at 10,000 widgets per month.

Now, if the average cost per widget is higher for all the other possible output levels, we can conclude that the factory has reached its efficient scale at 10,000 widgets per month.

Why Efficient Scale Matters

Efficient scale is an important concept for businesses and organizations of all sizes. It helps them to identify the optimal size of their operations and make sure they are not over- or under-producing. That way, they can maximize their efficiency and profitability.

In addition, the efficient scale also helps businesses to identify the most cost-effective production methods. For example, if a business is using too many resources, it may be more cost-effective to switch to a more automated production process.