Economies of scale
Cost advantages obtained by enterprises due to their scale of operation.
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Enterprises gain cost benefits from larger operational scales, with output per production cost as the typical metric.[1] Producing more units reduces the cost for each one, allowing output to grow while expenses shrink.[1] Cost advantages from scale appear across different organizational contexts and tiers, including individual production lines, factories, or whole companies.[2]
Quick Facts
- Field
- Microeconomics
- Known for
- Cost advantages from increased scale of operation
- Basis
- Technical
- statistical
- organizational
- or related to market control
- Common sources
- Purchasing
- managerial
- financial
- marketing
- technological
- Opposite
- Diseconomies of scale
- Key contributors mentioned
- Adam Smith
- Nicholas Georgescu-Roegen
- Nicholas Kaldor
Facts from the source article.
Key facts and history
Common sources of economies of scale include purchasing, managerial, financial, marketing, and technological factors.[3] Overall costs of capital projects are known to be subject to economies of scale, with a crude estimate that changing size changes capital cost by the 0.6 power of the capacity ratio.[4] Alfred Marshall noted that internal economies lead to a trend toward monopoly, but factors like the death of a founder and difficulty reaching new markets limit this.[5] Scale-related cost reductions from increased size stem solely from space's three-dimensional nature, not from indivisibility.[6]
Firms operating at a bigger scale can negotiate better input prices, gaining pecuniary advantages when buying raw materials and intermediate goods.[7] Expanded scale enables more effective labor division, which comes from faster production and the ability to employ specialized workers.[8]
What the cited sources add
The Corporate Finance Institute states that economies of scale refer to the cost advantage a firm experiences as it increases its output.[9] The Corporate Finance Institute notes that economies of scale also result in a fall in average variable costs with an increase in output.[9] The Corporate Finance Institute explains that economies of scale can arise from various sources, including bulk purchasing, improved management quality, and adoption of technologies that increase efficiency.[9] The Corporate Finance Institute describes internal economies as those unique to a firm, and external economies as those enjoyed by an entire industry.[9]
The Corporate Finance Institute gives an example of diseconomies of scale as a rise in average costs due to an increase in the scale of production.[9]
References
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: "Economies of Scale: What Are They and How Are They Used?", Investopedia (original not read by us) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: O'Sullivan, "Economics: Principles in Action", Pearson Prentice Hall, 2003, p. 157 (we also read that source) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: Chandler, "The Visible Hand: The Management Revolution in American Business", Belknap Press of Harvard University Press, 1993, p. 236 (we also read that source) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: Moore, "Economies of Scale: Some Statistical Evidence", Quarterly Journal of Economics, May 1959, p. 232–245 (original not read by us) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: ; cf.; Marshall 1890, p. 232–238, 378–380 (original not read by us) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: Morroni 2006, p. 169-170 (original not read by us) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: Morroni 2006, p. 169-170; "Economies of Scale - Definition, Types, Effects of Economies of Scale", Corporate Finance Institute (we also read that source) en.wikipedia.org
- Wikipedia, "Economies of scale" (CC BY-SA 4.0), which cites: ; On the relationship between built-in technical change and scale growth, see . (original not read by us) en.wikipedia.org
- "Economies of Scale - Definition, Types, Effects of Economies of Scale", Corporate Finance Institute. facts only, no text reused. corporatefinanceinstitute.com
Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Economies of scale (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.
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Sources
Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.
- Wikipedia: Economies of scale (CC BY-SA 4.0).
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