increase the size of the plant, hire more workers, buy more machines, and remove production
bottlenecks. In other words, your “fixed” costs become “variable” in the long run.
: SR “fixity” vs. LR “flexibility”
: If double all inputs, if Q:
Doubles you have constant returns to scale
Less than doubles, you have decreasing returns to scale
More than doubles, you have increasing returns to scale
Note that with economies of scale, average costs are falling as output increases
Economies of Scale
are cost advantages reaped by companies
. Companies can achieve economies of scale
by increasing production
and lowering costs
. This happens because
costs are spread over a larger number
. Costs can be
both fixed and variable
The size of the business generally matters when it comes to economies of scale.
the business is, the more the cost savings.
Economies of scale can be both internal and external
. Internal economies of scale are
based on management decisions, while external ones have to do with outside factors.
Most consumers do not understand why a smaller business charges more for a similar product
sold by a larger company. That is because the
cost per unit depends on how much the
. Larger companies are able to produce more by spreading the cost of
production over a larger amount of goods. An industry may also be
able to dictate the cost of
if there are number of different companies producing similar goods within the industry.
There are several reasons why economies of scale give rise to lower per-unit costs.
Specialization of labor and more integrated technology
Lower per-unit costs
can come from bulk orders from supplier, larger
advertising buys, or lower cost of capital.
Spreading internal function costs
across more units produced and sold helps
to reduce cost.
Internal functions include
accounting, information technology, and marketing. The first two
reasons are also considered operational efficiencies and synergies. The second two reasons are
cited as benefits of merger and acquisitions.
a company can create a diseconomy of scale when it becomes too large and chases an
economy of scale.
*learning by doing is a further source of economies of scale
There are two different types of economies of scale.