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Definition
Economies of scale refer to the reductions in average cost that
accrue to a firm when it increases its scale of production. As a firm
becomes large, certain advantages become available which allow it
to reduce its cost per unit of output. It is important to note that
economies of scale is a long-run concept, i.e. a concept that applies
only when all the factors of production available to the firm are
flexible or variable.
Types of Economies of Scale
Economies of scale come in different forms.
Technical Technical economies of scale exist when a firm can
spread its expenditure on large-scale machinery over a wide
range of output. For example, a firm that mass-produces cars can
purchase assembly-line equipment because it can be sure that
this equipment will be operated at full capacity, and therefore the
average cost of production will be reduced. However, a firm that
custom-builds high-end race cars will be unlikely to purchase
such equipment, as its small range of output would mean that
the equipment would be underutilised and therefore have a high
average cost.