Thursday, 21 June 2018

Investopedia/Sean Ross: What are some examples of economies of scale?

Investopedia
What are some examples of economies of scale?
By Sean Ross
Share
A:

Economies of scale occur whenever a firm's marginal costs of production decrease. They can result from changes on a macroeconomic level, such as reduced borrowing costs or new infrastructure, or from improvements on a business-specific level. This means a firm can sometimes realize economies of scale, or diseconomies of scale, based on variables outside of its control.

Nineteenth-century economist Alfred Marshall was the first to distinguish between internal economies of scale, which are controlled by the firm, and external economies of scale, which impact the industry as a whole. Marshall argued that external economies of scale lead to positive externalities and greatly contribute to economic growth. The invention of the Internet has created external economies of scale for businesses of all types by reducing the cost and time required to gather information; communicate with consumers and partners; and speed up operations.

Internal economies of scale can arise from many different sources. Economic theory suggests economies of scale arise as firms begin to specialize in their operations. This specialization can happen in the production process, the administrative process or the distribution process. For example, in a very micro sense, employees who use a keyboard can increase their marginal productivity by becoming better typists, which reduces the cost, or time, of each additional word typed.

Technical economies of scale can be achieved by improving the capital equipment and production processes that a firm uses. When Henry Ford introduced the assembly line to his automobile manufacturing plant, he significantly improved his company's economy of scale. By the time other businesses began adopting his more efficient production process, the assembly line had moved from being an internal economy of scale to an external one.

Some large, reputable firms can realize financial internal economies of scale by borrowing funds at lower interest rates than their competitors. Lower rates reduce the interest costs of capital expansion. This allows additional units to be produced with fewer input costs. On a more aggregate scale, financial external economies of scale can occur whenever the market rate of interest falls and borrowing costs decline across the entire economy.

Globalization has led large businesses to realize greater economies of scale by allowing them to pursue cheaper resources around the world. It may be cheaper, for instance, to employ labor in a workforce-rich developing country than in the United States. These scale economies do not just extend to labor; any input resource obtained at a lower cost can help reduce marginal costs, assuming the cost of finding, transporting or incorporating does not wash out any gains. Theoretically, globalization allows the productivity of the world to be maximized by allowing increased specialization, division of labor and economies of scale commensurate with the combined resources of the entire globe.
RELATED FAQS

    What is a diseconomy of scale and how does this occur?
    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become ... Read Answer >>
    What's the Difference Between Economy of Scope and Economy of Scale?
    Learn about economies of scope and economies of scale, the difference between the two economic concepts, and how they offer ... Read Answer >>
    What is the difference between a logarithmic price scale and a linear one?
    The interpretation of a stock chart can vary among different traders depending on the type of price scale used when viewing ... Read Answer >>
    How do property rights affect externalities and market failure?
    Most economic externalities can be efficiently solved through a system of private property rights, where costs and benefits ... Read Answer >>
    How do externalities affect equilibrium and create market failure?
    Discover the ways that externalities lead to market failure. Externalities are costs or benefits that go to a third party, ... Read Answer >>
    How do companies measure labor supply in human resources planning?
    Find out how and why a company's human resources department would measure labor supply, and what policies would address a ... Read Answer >>

Related Articles

    Managing Wealth
    Is Pressing The Trade Just Pressing Your Luck?
    Scaling up into a trade can be a lucrative strategy, but you need to understand the risks involved.
    Small Business
    Understanding Externality
    An externality is a consequence of an economic activity that is experienced by unrelated third parties.
    Insights
    The World's Top 10 Economies
    The United States has been the world's largest economy since 1871, but China's growth may soon position it as the leader of the world's top 10 economies.
    Investing
    Understanding Marginal Cost of Production
    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
    Financial Advisor
    These Will Be the World's Top Economies in 2020
    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
    Insights
    What's the Economy?
    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
    Investing
    Understanding Production Efficiency
    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.

RELATED TERMS

    Scale In
    Scale in is the process of purchasing shares in increments once ...
    Scale Out
    Scale out is the process of selling portions of total held shares ...
    Minimum Efficient Scale
    The minimum efficient scale is the least amount of production ...
    External Diseconomies Of Scale
    External diseconomies of scale are the result of outside factors ...
    Production Externality
    Production externality refers to a side effect from an industrial ...
    Economies of Scope
    Economies of scope are economic factors that make it cheaper ...

Hot Definitions

    Economies of Scale
    Quick Ratio
    Leverage
    Financial Risk
    Enterprise Value (EV)
    Relative Strength Index - RSI

    Work With Investopedia
    About Us Advertise With Us Contact Us Careers

© 2018, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy & Cookie Policy
Post a Comment