Name : Khara Karisia Dimpudus NRP : 2512100071

Economies of Scale
Definition: A reduction in long run unit costs which arise from an increase in production. Economies of scale occur when larger firms are able to lower their unit costs. This may happen for a variety of reasons. A larger firm may be able to buy in bulk, it may be able to organise production more efficiently, it may be able to raise capital cheaper and more efficiently. All of these represent economies of scale. When defining comparative advantage, the Ricardian model and the Heckscher-Ohlin model both assume constant returns to scale: If all factors of production are doubled then output will also double. But a firm or industry may have increasing returns to scale or economies of scale: If all factors of production are doubled, then output will more than double. Larger is more efficient: the cost per unit of output falls as a firm or industry increases output. The Ricardian and Heckscher-Ohlin models also rely on competition to predict that all income from production is paid to owners of factors of production: no excess or monopoly profits exist. But when economies of scale exist, large firms may be more efficient than small firms, and the industry may consist of a monopoly or a few large firms. Production may be imperfectly competitive in the sense that excess or monopoly profits are captured by large firms. Economies of scale could mean either that larger firms or that a larger industry (e.g., one made of more firms) is more efficient. External economies of scale occur when cost per unit of output depends on the size of the industry. Internal economies of scale occur when the cost per unit of output depends on the size of a firm. External economies of scale may result if a larger industry allows for more efficient provision of services or equipment to firms in the industry. Many small firms that are competitive may comprise a large industry and benefit from services or equipment efficiently provided to the large group of firms. Internal advantages that arise as a result of the growth of the firm Technical Commercial Financial Managerial Risk Bearing External economies of scale the advantages firms can gain as a result of the growth of the industry normally associated with a particular area Supply of skilled labour Reputation

Name : Khara Karisia Dimpudus NRP : 2512100071 Local knowledge and skills Infrastructure Training facilities Internal: Technical Specialisation large organisations can employ specialised labour Indivisibility of plant machines cant be broken down to do smaller jobs! Principle of multiples firms using more than one machine of different capacities - more efficient Increased dimensions bigger containers can reduce average cost
Unit Cost Scale A 82p Scale B 54p LRAC

MES

Output

The disadvantages of large scale production that can lead to increasing average costs Problems of management Maintaining effective communication Co-ordinating activities often across the globe! De-motivation and alienation of staff Divorce of ownership and control

References Economies of Scale, viewed on October 15, 2012, <http://www.bized.co.uk/search/node/economies%20of%20scale>