What are the main sources of Economies of Scale?
economies of scale are the cost advantages that enterprises get due to their scale of operation, with cost per unit of output decreasing which causes scale increasingThe degree of market control may be influenced by technical, statistical, organizational and related factors.
Economies of scale apply to a variety of organizational and business situations, such as a production plant or an entire enterprise.Economies of scale occur when average costs fall as output increases.Some economies of scale, such as the capital cost of manufacturing facilities and the loss of transportation and industrial equipment, have an engineering basis.
Purchasing inputs at a lower per-unit cost when they are purchased in large quantities is a source of scale economies.
The idea of obtaining larger production returns through the use of division of labor dates back to Adam Smith.Diseconomies of scale are different.
The optimum design point, where costs per additional unit begin to increase, is one of the limits of economies of scale.Common limits include exceeding the nearby raw material supply.The regional market is being saturated by a common limit for a low cost per unit weight commodities.Limits include using energy less efficiently or having a higher defect rate.
Large producers find it costly to switch grades frequently because they are efficient at long runs of a product grade.Even though they have higher margins, they will avoid specialty grades.Smaller manufacturing facilities can still be viable if they change from commodity-grade production to specialty products.[3][4]
Economies of scale are related to an increase in the production of a given plant.When a plant is used below its optimal production capacity, increases in its degree of utilization bring about decreases in the total average cost of production.These economies are not economies of scale.
The meaning of economies of scale is doing things more efficiently.Purchasing, managerial, financial, and marketing are some of the common sources of economies of scale.The LRAC of production can be reduced by shifting the short-run average total cost curve to the right.
The number of firms in a market may be explained by the concept of economies of scale.Some industries grow large due to the exploitation of economies of scale.It is also a justification for free trade policies, since some economies of scale may require a larger market than is possible within a particular country.A lone carmaker may be profitable, but even more so if they export cars to global markets and sell to the local market.There is a role for economies of scale in a natural monopoly.There is a difference between internal and external economies.An industry that exhibits an internal economy of scale is one where the costs of production fall when the number of firms in the industry drops, but the remaining firms increase their production to match previous levels.When costs drop due to the introduction of more firms, an industry exhibits an external economy of scale, allowing for more efficient use of specialized services and machinery.
The square– cube law is one of the economies of scale that have a physical basis.The capital cost of buildings, factories, ships, and airplanes can be affected by this law.[6]
Although the physical details can be quite complicated, drag loss of vehicles like aircraft or ships increases less than proportional with increasing cargo volume.Making them bigger results in less fuel use per ton of cargo at a given speed.
Similar to the square– cube law, heat loss from industrial processes varies per unit of volume for pipes, tanks and other vessels.In some productions, an increase in the size of the plant reduces the average variable cost, thanks to the energy savings resulting from the lower dispersion of heat.
There is confusion between indivisibility and three-dimensionality of space.Three-dimensional production elements, such as pipes and ovens, are always technically indivisible.The economies of scale are dependent on the three-dimensionality of space.Indivisibility only entails economies of scale produced by the balancing of productive capacities, or of increasing returns in the utilisation of a single plant, due to its more efficient use as the quantity produced increases.This latter phenomenon has nothing to do with the economies of scale which are linked to the use of a larger plant.[9]
Return to scale is linked to statistical factors at the base of economies of scale.The larger the number of resources involved, the smaller the amount of reserves needed to cope with unforeseen contingencies.10
A larger scale generally determines greater bargaining power over input prices and therefore benefits from pecuniary economies in terms of purchasing raw materials and intermediate goods compared to companies that make orders for smaller amounts.The fact that nothing changes from the "physical" point of view of the returns to scale is highlighted in this case.If the scale of production increases, the average costs of supply contracts will decrease.[2]
Economies of productive capacity balancing derives from the possibility that a larger scale of production involves a more efficient use of the production capacities of individual phases.A small scale may be subject to the under utilization of the productive capacity of some sub-processes if the inputs are indivisible and complimentary.Different production capacities can be compatible with a higher production scale.In the case of a high cost of machinery, the reduction in machinery idling times is important.[13]
The division of labour can be more efficient with a larger scale.The economies of division of labour are related to the increase in production speed and the use of specialized personnel.The quality of inputs and outputs will inevitably change as a result of an increase in the division of labour.It was [13].
Administrative and organizational activities are mostly cognitive and are not dependent on the scale of production.There are a number of advantages when the size of the company and the division of labour increases.Managers can reproduce the procedures and routines that turned out to be the best at different times.
Learning and growth economies are associated with the process of growth of the scale and not the dimensions of scale per se.Learning by doing implies improvements in the ability to perform and promotes the introduction of incremental innovations with a progressive lowering of average costs.The cumulative production is directly proportional to learning economies.Growth economies occur when a company increases its size.The presence of some resource or competence that is not fully utilized, or the existence of specific market positions that create a differential advantage in expanding the size of the firms are the reasons for these economies.Once the scale size expansion process is completed, the growth economies disappear.A company that owns a supermarket chain can benefit from an economy of growth if it opens a new store.The sale of these lands to economic operators, who wish to open shops near the supermarket, allows the company in question to make a profit.[17]
The costs of capital projects are subject to the economies of scale.A crude estimate is that if the capital cost for a given piece of equipment is known, changing the size will change it by 0.6 power of the capacity ratio.[18][19]
It typically takes an insignificant amount of labor to install a larger capacity electrical wire or pipe.[20]
As the size of equipment increases, the cost of a unit of capacity decreases.The efficiency increases with the size.[21]
The operating crew size does not increase in proportion to capacity.The operating crew consists of pilots, co-pilots, navigators.It does not include passenger service personnel.Many aircraft models were stretched to increase their capacity.[23]
Many manufacturing facilities, especially those making bulk materials like chemicals, refined petroleum products, cement and paper, have labor requirements that are not influenced by plant capacity changes.The labor requirements of automated processes tend to be based on the complexity of the operation rather than the production rate, and many manufacturing facilities have the same basic number of processing steps and pieces of equipment, regardless of production capacity.
Large scale manufacturing allowed economical use of products that would otherwise be thrown away.Marx said that the chemical industry is dependent on turning various residual reactant streams into salable products.In the paper industry, it is economical to burn bark and fine wood particles to produce steam and to recover the spent chemicals for conversion back to a usable form.
Large and more productive firms usually have enough net revenues abroad to cover the costs of exporting.In the event of trade liberalization, resources will have to be reallocated to the more productive firm, which will raise the average productivity within the industry.[26]
Firms have different productivity and quality of labor.It is because of this that more efficient firms are more likely to export their goods and services.A firm's total sales and underlying efficiency are related.Lower productivity will lead to lower sales for firms with higher productivity.Due to export growth, organizations can drop their trade costs.There is no account for any tariffs reduction or shipping logistics improvement.The total economies of scale are based on the size of the exporter.Large-scale companies are more likely to have a lower cost per unit.High trade frequencies are able to reduce their overall cost when compared to low-trade frequencies.[28]
Economies of scale can be confused with the idea of returns to scale.When economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run production function.If output increases by the same proportion as inputs, the production function will have constant returns to scale.If doubling inputs results in less than double the output, returns are decreasing.If a mathematical function is used to represent the production function, then returns to scale are represented by the degree of homogeneity of the function.Homogeneous production functions with constant returns to scale are first degree homogeneity, with increases and decreases represented by degrees of homogeneity greater than one.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs it purchases, then it can be shown that it has economies of scale.With perfect competition in the output market, the long-run equilibrium will involve all firms operating at the minimum point of their long run average cost curves.
The above conclusions are modified if the firm is not a perfect competitor in the input markets.If the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then it could have diseconomies of scale.If the firm is able to get bulk discounts of an input, it could have economies of scale in some range of output levels, even if it has decreasing returns in production in that output range.
The variation in the relationship between inputs and outputs is referred to as returns to scale.The relationship is expressed in physical terms.The relation between the average production cost and the size of the economy is taken into account when discussing economies of scale.Variations in input prices affect economies of scale.The notions of increasing returns to scale and economies of scale can be considered equivalent if input prices remain the same.It is necessary to distinguish between returns to scale and economies of scale if input prices vary in relation to quantities purchased by the company.The concept of economies of scale is more general than returns to scale since it includes the possibility of changes in the price of inputs if the quantity purchased varies with the scale of production.[32]
The literature assumed that due to the competitive nature of reverse auctions, suppliers seek higher volumes in order to compensate for lower prices and lower margins.Buyers benefit from the lower transaction costs and economies of scale that result from larger volumes.Many studies have indicated that the procurement volume must be high to provide enough profits to attract enough suppliers, and to give buyers enough savings to cover their additional costs.[33]
The higher the volume of reverse auctions conducted in the public sector, the less successful they were.They found that auction volume did not correlate with competition or the number of people bidding.They noted that their data included a wide range of products and the degree of competition in each market varied significantly, and that further research on this issue should be conducted to determine whether these findings remain the same when purchasing a same product for both small and high volumes.Increasing auction volume may increase competition.[33]
The First Book of Wealth of Nations by Adam Smith was the first systematic analysis of the advantages of division of labour capable of generating economies of scale.
In Chapter IX of the First Book of his Principles, John Stuart Mill analyses the relationships between increasing returns and scale of production inside the production unit.
According to Karl Marx, economies of scale are one of the factors underlying the ever-increasing concentration of capital.Marx says that in the capitalist system the technical conditions of the work process are constantly changed in order to increase the surplus.Marx said that the cooperation of many workers brings about an economy in the use of the means of production and an increase in productivity.Significant savings in construction, installation and operation costs can be achieved by increasing the size of the machinery.The tendency to exploit economies of scale requires a constant expansion of the market in order to increase the volume of production.Overproduction crises can occur if the market does not expand at the same rate as production increases.Marx states that the capitalist system is characterized by two tendencies: towards a growing concentration and towards economic crises due to overproduction.[35]
Karl Marx observes that economies of scale have historically been associated with an increasing concentration of private wealth and have been used to justify such concentration.Marx points out that concentrated private ownership of large-scale economic enterprises is not essential to the nature of such enterprises.Marx calls attention to the sophistical nature of the arguments used to justify the system of concentrated ownership of land.
Marx believes that economies of scale should be realized by associations.
The internal economies have been considered by some, among whom Cournot himself, despite the fact that their premises lead inevitably to the conclusion that whatever firm first gets a good start will obtain a monopoly of the whole business of its trade.Marshall believes that there are factors that limit the trend toward monopoly.
In order to justify the operation of the law of increasing returns without it coming into conflict with the hypothesis of free competition, Marshall tended to highlight the advantages of external economies linked to an increase in the production of an entire sector of activity."These economies which are external from the point of view of the individual firm, but internal as regards the industry in its aggregate, constitute precisely the class which is most seldom to be met with."In so far as external economies of the kind in question exist, they are not linked to be called forth by small increases in production, as required by the marginalist theory of price.In the equilibrium theory of the individual industries, the presence of external economies is not important because the theory is based on marginal changes in the quantities produced.
If the hypothesis of perfect competition is maintained, economies of scale should not be included.He suggests abandoning the assumption of free competition to address the study of firms that have their own market.There were many studies on the cases of imperfect competition in Cambridge.In the future, Sraffa will follow a different path of research that will lead him to write and publish his main work Production of commodities by means of Commodities.In this book, Sraffa determines relative prices assuming no changes in output, so that no question arises as to the variation or constancy of returns.