0Economies of scale:
Economies of scale refers to the situation where long-run average costs fall as the scale of production is increased. If all factor costs are constant, then increasing returns to scale will result in economies of scale.
Possible causes of economies of scale include:
- specialisation and the division of labour, where work is broken down into smaller and smaller tasks in which workers specialise, thereby becoming more efficient and productive.
- Indivisibilities which refers to the impossibility of dividing some factors (eg large machinery) into smaller units.
- The “container” principle, whereby the average cost of a unit of output produced by capital equipment that contains things (eg oil tankers) falls with the size of the capital equipment.
- The greater efficiency of large machines.
- The production of by-products, in sufficient amounts that they can be sold profitably.
- Multistage production, which saves the time and cost involved in moving unfinished goods between locations.
These are all plant economies of scale, which arise because of the large size of the factory.
Other possible economies of scale include:
- Organisational: Perhaps due to rationalisation, which involves reorganizing production to reduce waste and duplication
- Sspreading overhead costs, ie the general costs associated with running a business that are only loosely related to output level, eg marketing, human resources
- Financial economies, eg lower interest costs, discounts for bulk purchases
- Economies of scope, when increasing the range of goods produced reduces the
- Cost of producing each good, eg shared marketing.
Diseconomies of scale:
Diseconomies of scale refer to the situation where long-run average costs rise as the scale of production is increased. They may arise from:
- Managerial problems of co-ordination and communication.
- Alienation and poor motivation of the workforce.
- Poor industrial relations.
- Problems in one area holding up all production.
