Economies of scale

Economies of Scale

Economies of scale (/ɪˈkɒnəmiːz ɒv skeɪl/) is a term used in microeconomics to describe the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Etymology

The term "economies of scale" is derived from the economic principle of increasing or decreasing returns to scale. The concept was first introduced by Adam Smith in his book, "The Wealth of Nations", where he discussed the idea of division of labor leading to increased productivity.

Definition

Economies of scale occur when the cost per unit of production decreases as the volume of output increases. This is because the fixed costs, such as capital investment in buildings and machinery, can be spread over more units of production.

Types of Economies of Scale

There are two main types of economies of scale:

• Internal economies of scale: These are the cost savings that come from increasing the size of the company itself. They can result from factors such as improved production methods, more efficient administration, or bulk buying of materials.

• External economies of scale: These occur outside of a firm but within an industry. They can result from factors such as the growth of the industry itself, improved transportation infrastructure, or technological advancements.

Related Terms

• Diseconomies of scale: This is the opposite of economies of scale. It occurs when the cost per unit increases as the quantity of output increases.

• Returns to scale: This is a concept in economics that assesses the impact of scaling up production on output.

• Cost curve: This is a graph that shows the cost of production as a function of quantity produced.

• Marginal cost: This is the cost of producing one more unit of a good or service.

• Average cost: This is the total cost divided by the number of goods or services produced.

See Also

• Microeconomics
• Macroeconomics
• Production theory basics

External links

• Medical encyclopedia article on Economies of scale
• Wikipedia's article - Economies of scale

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