How do the economies of scale

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How do the economies of scale

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LINFO Economies of Scale Definition Economies of scale, also called increasing returns to scale, is a term used by economists to refer to the situation in which the cost of producing an additional unit of output i.

It could also be defined as the situation in which an equal percentage increase in all inputs results in a greater percentage increase in output1. It is important to understand the concept of economies of scale because they can be an important factor in determining the optimal and equilibrium size of firms2 and thus the structure of industries and their prices and output levels.

Thus, they can have major implications for public policy, particularly where they lead to the development of natural monopoliesor where monopolies that are not natural monopolies claim that they are in order to try to prevent government attempts to break them up.

How do the economies of scale

Extent of Economies of Scale The extent to which economies of scale exist varies greatly according to the industry i. In some industries they might be insignificant, and thus such industries would likely characterized by numerous small firms competing with each other.

At the other extreme, there are industries for which economies of scale exist for the entire level of output that the market could absorb.

This means that the marginal cost, and thus the average cost, of output would be lower if there were a single firm in the industry than if there were multiple firms.

This type of industry is referred to as a natural monopoly. A monopoly is the situation in which there is only a single supplier of a product in a particular market.

Utilities such as pipelines, electrical distribution systems and railroads are typically natural monopolies in the areas that they serve.

For most industries, economies of scale usually do not necessarily exist over the entire possible range of outputs. Rather, they occur only to a certain level of output, or business size, and then diseconomies of scale, or decreasing returns to scale can set in, resulting in a U-shaped cost curve i.

The simple model of perfect competition i. This model can be very useful, both for teaching economics and for explaining certain real-world situations. However, it should always be kept in mind that there are many situations in which it does not apply. Fixed Costs and Economies of Scale Marginal cost can decrease as the volume of output increases for several reasons.

One is that larger production volumes allow fixed costs to be spread over more units of output. Fixed costs are costs that do not change regardless of the amount of use, or at least change relatively little as a function of use.

That is, they are costs that must be incurred even if production were to drop to zero. Examples of fixed costs could include factories, warehouses, machinery, electrical transmission systems and railways. Others would include a tunnel for which there would be no change in cost regardless of the amount or rail or road traffic going through it and an electrical transmission system which would presumably have certain maintenance costs regardless of the amount of power flowing through it.

Of course, there are current costs associated with these assets, and some of them will likely vary, at least in part, according to the level of output, such as maintenance and security. However, these costs often tend to be relatively small relative to the costs of the main production assets themselves.

Variable costs, in contrast to fixed costs, change directly as a function of use. Examples of variable costs are iron, coal, coal and labor and for producing steel, electricity or diesel fuel for hauling trains and skilled labor e.

Large economies of scale are most likely to be found in industries characterized by large fixed costs. Large fixed costs, and hence large economies of scale, are prevalent in highly capital intensive industries such as railroads, steelmaking, petroleum refining, aircraft manufacturing and semiconductor production.

That is, very large levels of production are required to bring unit costs down to the lowest possible levels.

To attain such levels of output, it is necessary to have massive investment in production facilities, measured in the billions of dollars. Semiconductor production is not a natural monopoly. That is, the economies of scale are not so great that the average cost could be minimized by just having one worldwide producer instead of multiple producers.

This is because after a certain level of output that is far less than total worldwide demand, the average cost at each plant starts rising again. Whether the production of large-sized aircraft is a natural monopoly is a more difficult question.

At present, there are only two major producers worldwide, and without large subsidies and other protectionist measures by governments there might only be one.

Other Causes of Decreasing Costs There are other reasons that the cost of producing an an additional unit of output can decrease as the volume of output increases. One is that a larger firm also might be able to organize production more efficiently than a smaller one. This could be the result of something inherent in the production process that causes it.

For example, steelmaking is more efficient with larger blast furnaces for various technical reasons, including better retention of heat. Likewise, certain chemical production processes are more efficient on larger scales.

Another reason might be that a certain volume of output is necessary to be able to afford a certain number and quality of management and technology specialists that are needed to attain a lower cost of production.

The marginal cost may also decline for larger volumes of output because larger volumes of output enable a firm to obtain its inputs at lower prices.

For example, a larger producer is often able to obtain reduced prices from suppliers for its inputs, in part because the unit costs to the suppliers are lower for larger volumes in some cases due to economies of scale that the suppliers themselves experience.

Also, commodity freight rates usually decline as the volume of cargo tonnage shipped increases, and this can apply to either or both inputs and the final product. Moreover, a larger firm might be able to obtain financing at lower interest rates than a smaller firm, also contributing to its lower costs.Economies of scope are "efficiencies formed by variety, not volume" (the latter concept is "economies of scale").

For example, many corporate diversification plans assume that economies of scope . When more women work, economies grow. If women’s paid employment rates were raised to the same level as men’s, the United States’ gross domestic product would be an estimated 9 per cent higher, the Euro-zone’s would climb by 13 per cent, and Japan’s would be boosted by 16 per cent.

GCSE Industry Glossary. [email protected]: a high-tech zone located on a brownfield site in Barcelona. Agglomeration: a group of industries in the same location.. Agglomeration Economies: savings which arise from the concentration of industries in urban areas and their location close to linked activities.

e.g.A car factory attracts component suppliers to locate close by, saving on transport costs. This week, I was asked, “What does ‘scale’ the business mean?” “Scale” is an often used in business and can have different meanings depending on the context.

Economies of scope - Wikipedia

Some common examples include: “Are we operating the business at scale?” or “Are we taking advantage of the scale of our business?” or “Can the product scale-up or. Economies of scale is an economics term that describes a competitive advantage that large entities have over smaller entities.

It means that the larger the business, non-profit or government, the lower its costs. For example, the cost of producing one unit is less when many units are produced at. Economies of scale, also called increasing returns to scale, is a term used by economists to refer to the situation in which the cost of producing an additional unit of output (i.e., the marginal cost) of a product (i.e., a good or service) decreases as the volume of output (i.e., the scale of production) increases.

It could also be defined as .

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