Economies of scale - Wikipedia

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the ... Economiesofscale FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Costadvantagesobtainedviascaleofoperation AsquantityofproductionincreasesfromQtoQ2,theaveragecostofeachunitdecreasesfromCtoC1.LRACisthelong-runaveragecost Inmicroeconomics,economiesofscalearethecostadvantagesthatenterprisesobtainduetotheirscaleofoperation,andaretypicallymeasuredbytheamountofoutputproducedperunitoftime.Adecreaseincostperunitofoutputenablesanincreaseinscale.Atthebasisofeconomiesofscale,theremaybetechnical,statistical,organizationalorrelatedfactorstothedegreeofmarketcontrol.Thisisjustapartialdescriptionoftheconcept. Economiesofscaleapplytoavarietyoftheorganizationalandbusinesssituationsandatvariouslevels,suchasaproduction,plantoranentireenterprise.Whenaveragecostsstartfallingasoutputincreases,theneconomiesofscaleoccur. Someeconomiesofscale,suchascapitalcostofmanufacturingfacilitiesandfrictionlossoftransportationandindustrialequipment,haveaphysicalorengineeringbasis. TheeconomicconceptdatesbacktoAdamSmithandtheideaofobtaininglargerproductionreturnsthroughtheuseofdivisionoflabor.[1]Diseconomiesofscalearetheopposite. Economiesofscaleoftenhavelimits,suchaspassingtheoptimumdesignpointwherecostsperadditionalunitbegintoincrease.Commonlimitsincludeexceedingthenearbyrawmaterialsupply,suchaswoodinthelumber,pulpandpaperindustry.Acommonlimitforalowcostperunitweightcommoditiesissaturatingtheregionalmarket,thushavingtoshipproductuneconomicdistances.Otherlimitsincludeusingenergylessefficientlyorhavingahigherdefectrate. Largeproducersareusuallyefficientatlongrunsofaproductgrade(acommodity)andfinditcostlytoswitchgradesfrequently.Theywill,therefore,avoidspecialtygradeseventhoughtheyhavehighermargins.Oftensmaller(usuallyolder)manufacturingfacilitiesremainviablebychangingfromcommodity-gradeproductiontospecialtyproducts.[a][2] Economiesofscalemustbedistinguishedfromeconomiesstemmingfromanincreaseintheproductionofagivenplant.Whenaplantisusedbelowitsoptimalproductioncapacity,increasesinitsdegreeofutilizationbringaboutdecreasesinthetotalaveragecostofproduction.Asnoticed,amongtheothers,byNicholasGeorgescu-Roegen(1966)andNicholasKaldor(1972)theseeconomiesarenoteconomiesofscale. Contents 1Overview 2Determinantsofeconomiesofscale 2.1Physicalandengineeringbasis:economiesofincreaseddimension 2.2Economiesinholdingstocksandreserves 2.3Transactioneconomies 2.4Economiesderivingfromthebalancingofproductioncapacity 2.5Economiesresultingfromthedivisionoflabourandtheuseofsuperiortechniques 2.6Managerialeconomics 2.7Learningandgrowtheconomies 2.8Capitalandoperatingcost 2.9Crewsizeandotheroperatingcostsforships,trainsandairplanes 2.10Economicaluseofbyproducts 2.11Economiesofscaleandthesizeofexporter 3Economiesofscaleandreturnstoscale 4Economiesofscaleinthehistoryofeconomicanalysis 4.1Economiesofscaleinclassicaleconomists 4.2EconomiesofscaleinMarxanddistributionalconsequences 4.3EconomiesofscaleinMarshall 4.4Sraffa'scritique 4.5Economiesofscaleandthetendencytowardsmonopoly:"Cournot'sdilemma" 5Externaleconomiesofscale 6Sources 6.1Purchasing 6.2Managerial 6.3Technological 7Seealso 8Notes 9References 9.1Citations 9.2Generalandcitedreferences 10Externallinks Overview[edit] Thesimplemeaningofeconomiesofscaleisdoingthingsmoreefficientlywithincreasingsize.[3]Commonsourcesofeconomiesofscalearepurchasing(bulkbuyingofmaterialsthroughlong-termcontracts),managerial(increasingthespecializationofmanagers),financial(obtaininglower-interestchargeswhenborrowingfrombanksandhavingaccesstoagreaterrangeoffinancialinstruments),marketing(spreadingthecostofadvertisingoveragreaterrangeofoutputinmediamarkets),andtechnological(takingadvantageofreturnstoscaleintheproductionfunction).Eachofthesefactorsreducesthelongrunaveragecosts(LRAC)ofproductionbyshiftingtheshort-runaveragetotalcost(SRATC)curvedownandtotheright. Economiesofscaleisaconceptthatmayexplainpatternsininternationaltradeorinthenumberoffirmsinagivenmarket.Theexploitationofeconomiesofscalehelpsexplainwhycompaniesgrowlargeinsomeindustries.Itisalsoajustificationforfreetradepolicies,sincesomeeconomiesofscalemayrequirealargermarketthanispossiblewithinaparticularcountry—forexample,itwouldnotbeefficientforLiechtensteintohaveitsowncarmakeriftheyonlysoldtotheirlocalmarket.Alonecarmakermaybeprofitable,butevenmoresoiftheyexportedcarstoglobalmarketsinadditiontosellingtothelocalmarket.Economiesofscalealsoplayaroleina"naturalmonopoly".Thereisadistinctionbetweentwotypesofeconomiesofscale:internalandexternal.Anindustrythatexhibitsaninternaleconomyofscaleisonewherethecostsofproductionfallwhenthenumberoffirmsintheindustrydrops,buttheremainingfirmsincreasetheirproductiontomatchpreviouslevels.Conversely,anindustryexhibitsanexternaleconomyofscalewhencostsdropduetotheintroductionofmorefirms,thusallowingformoreefficientuseofspecializedservicesandmachinery. Determinantsofeconomiesofscale[edit] Physicalandengineeringbasis:economiesofincreaseddimension[edit] Someoftheeconomiesofscalerecognizedinengineeringhaveaphysicalbasis,suchasthesquare–cubelaw,bywhichthesurfaceofavesselincreasesbythesquareofthedimensionswhilethevolumeincreasesbythecube.Thislawhasadirecteffectonthecapitalcostofsuchthingsasbuildings,factories,pipelines,shipsandairplanes.[b] Instructuralengineering,thestrengthofbeamsincreaseswiththecubeofthethickness. Draglossofvehicleslikeaircraftorshipsgenerallyincreaseslessthanproportionalwithincreasingcargovolume,althoughthephysicaldetailscanbequitecomplicated.Therefore,makingthemlargerusuallyresultsinlessfuelconsumptionpertonofcargoatagivenspeed. Heatlossfromindustrialprocessesvaryperunitofvolumeforpipes,tanksandothervesselsinarelationshipsomewhatsimilartothesquare–cubelaw.[c][4]Insomeproductions,anincreaseinthesizeoftheplantreducestheaveragevariablecost,thankstotheenergysavingsresultingfromthelowerdispersionofheat. Economiesofincreaseddimensionareoftenmisinterpretedbecauseoftheconfusionbetweenindivisibilityandthree-dimensionalityofspace.Thisconfusionarisesfromthefactthatthree-dimensionalproductionelements,suchaspipesandovens,onceinstalledandoperating,arealwaystechnicallyindivisible.However,theeconomiesofscaleduetotheincreaseinsizedonotdependonindivisibilitybutexclusivelyonthethree-dimensionalityofspace.Indeed,indivisibilityonlyentailstheexistenceofeconomiesofscaleproducedbythebalancingofproductivecapacities,consideredabove;orofincreasingreturnsintheutilisationofasingleplant,duetoitsmoreefficientuseasthequantityproducedincreases.However,thislatterphenomenonhasnothingtodowiththeeconomiesofscalewhich,bydefinition,arelinkedtotheuseofalargerplant.[5] Economiesinholdingstocksandreserves[edit] Atthebaseofeconomiesofscaletherearealsoreturnstoscalelinkedtostatisticalfactors.Infact,thegreaterofthenumberofresourcesinvolved,thesmaller,inproportion,isthequantityofreservesnecessarytocopewithunforeseencontingencies(forinstance,machinespareparts,inventories,circulatingcapital,etc.).[6] Transactioneconomies[edit] Alargerscalegenerallydeterminesgreaterbargainingpoweroverinputpricesandthereforebenefitsfrompecuniaryeconomiesintermsofpurchasingrawmaterialsandintermediategoodscomparedtocompaniesthatmakeordersforsmalleramounts.Inthiscase,wespeakofpecuniaryeconomies,tohighlightthefactthatnothingchangesfromthe"physical"pointofviewofthereturnstoscale.Furthermore,supplycontractsentailfixedcostswhichleadtodecreasingaveragecostsifthescaleofproductionincreases.[7]Thisisofimportantutilityinthestudyofcorporatefinance.[8] Economiesderivingfromthebalancingofproductioncapacity[edit] Economiesofproductivecapacitybalancingderivesfromthepossibilitythatalargerscaleofproductioninvolvesamoreefficientuseoftheproductioncapacitiesoftheindividualphasesoftheproductionprocess.Iftheinputsareindivisibleandcomplementary,asmallscalemaybesubjecttoidletimesortotheunderutilizationoftheproductivecapacityofsomesub-processes.Ahigherproductionscalecanmakethedifferentproductioncapacitiescompatible.Thereductioninmachineryidletimesiscrucialinthecaseofahighcostofmachinery.[9] Economiesresultingfromthedivisionoflabourandtheuseofsuperiortechniques[edit] Alargerscaleallowsforamoreefficientdivisionoflabour.Theeconomiesofdivisionoflabourderivefromtheincreaseinproductionspeed,fromthepossibilityofusingspecializedpersonnelandadoptingmoreefficienttechniques.Anincreaseinthedivisionoflabourinevitablyleadstochangesinthequalityofinputsandoutputs.[10] Managerialeconomics[edit] Manyadministrativeandorganizationalactivitiesaremostlycognitiveand,therefore,largelyindependentofthescaleofproduction.[11]Whenthesizeofthecompanyandthedivisionoflabourincrease,thereareanumberofadvantagesduetothepossibilityofmakingorganizationalmanagementmoreeffectiveandperfectingaccountingandcontroltechniques.[12]Furthermore,theproceduresandroutinesthatturnedouttobethebestcanbereproducedbymanagersatdifferenttimesandplaces. Learningandgrowtheconomies[edit] Learningandgrowtheconomiesareatthebaseofdynamiceconomiesofscale,associatedwiththeprocessofgrowthofthescaledimensionandnottothedimensionofscaleperse.Learningbydoingimpliesimprovementsintheabilitytoperformandpromotestheintroductionofincrementalinnovationswithaprogressiveloweringofaveragecosts.[13]Learningeconomiesaredirectlyproportionaltothecumulativeproduction(experiencecurve). Growtheconomiesoccurwhenacompanyacquiresanadvantagebyincreasingitssize.Theseeconomiesareduetothepresenceofsomeresourceorcompetencethatisnotfullyutilized,ortotheexistenceofspecificmarketpositionsthatcreateadifferentialadvantageinexpandingthesizeofthefirms.Thatgrowtheconomiesdisappearoncethescalesizeexpansionprocessiscompleted.Forexample,acompanythatownsasupermarketchainbenefitsfromaneconomyofgrowthif,openinganewsupermarket,itgetsanincreaseinthepriceofthelanditownsaroundthenewsupermarket.Thesaleoftheselandstoeconomicoperators,whowishtoopenshopsnearthesupermarket,allowsthecompanyinquestiontomakeaprofit,makingaprofitontherevaluationofthevalueofbuildingland.[14] Capitalandoperatingcost[edit] Overallcostsofcapitalprojectsareknowntobesubjecttoeconomiesofscale.Acrudeestimateisthatifthecapitalcostforagivensizedpieceofequipmentisknown,changingthesizewillchangethecapitalcostbythe0.6powerofthecapacityratio(thepointsixtothepowerrule).[15][d] Inestimatingcapitalcost,ittypicallyrequiresaninsignificantamountoflabor,andpossiblynotmuchmoreinmaterials,toinstallalargercapacityelectricalwireorpipehavingsignificantlygreatercapacity.[16] Thecostofaunitofcapacityofmanytypesofequipment,suchaselectricmotors,centrifugalpumps,dieselandgasolineengines,decreasesassizeincreases.Also,theefficiencyincreaseswithsize.[17] Crewsizeandotheroperatingcostsforships,trainsandairplanes[edit] Operatingcrewsizeforships,airplanes,trains,etc.,doesnotincreaseindirectproportiontocapacity.[18](Operatingcrewconsistsofpilots,co-pilots,navigators,etc.anddoesnotincludepassengerservicepersonnel.)Manyaircraftmodelsweresignificantlylengthenedor"stretched"toincreasepayload.[19] Manymanufacturingfacilities,especiallythosemakingbulkmaterialslikechemicals,refinedpetroleumproducts,cementandpaper,havelaborrequirementsthatarenotgreatlyinfluencedbychangesinplantcapacity.Thisisbecauselaborrequirementsofautomatedprocessestendtobebasedonthecomplexityoftheoperationratherthanproductionrate,andmanymanufacturingfacilitieshavenearlythesamebasicnumberofprocessingstepsandpiecesofequipment,regardlessofproductioncapacity. Economicaluseofbyproducts[edit] KarlMarxnotedthatlargescalemanufacturingallowedeconomicaluseofproductsthatwouldotherwisebewaste.[20]Marxcitedthechemicalindustryasanexample,whichtodayalongwithpetrochemicals,remainshighlydependentonturningvariousresidualreactantstreamsintosalableproducts.Inthepulpandpaperindustry,itiseconomicaltoburnbarkandfinewoodparticlestoproduceprocesssteamandtorecoverthespentpulpingchemicalsforconversionbacktoausableform. Economiesofscaleandthesizeofexporter[edit] Largeandmoreproductivefirmstypicallygenerateenoughnetrevenuesabroadtocoverthefixedcostsassociatedwithexporting.[21]However,intheeventoftradeliberalization,resourceswillhavetobereallocatedtowardthemoreproductivefirm,whichraisestheaverageproductivitywithintheindustry.[22] Firmsdifferintheirlaborproductivityandthequalityoftheirgoodsproduced.Itisbecauseofthisthatmoreefficientfirmsaremorelikelytogeneratemorenetincomeabroadandthusbecomeexportersoftheirgoodsorservices.Thereisacorrelatingrelationshipbetweenafirms'totalsalesandunderlyingefficiency.Firmswithhigherproductivitywillalwaysoutperformafirmwithlowerproductivitywhichwillleadtolowersales.Throughtradeliberalization,organizationsareabletodroptheirtradecostsduetoexportgrowth.However,tradeliberalizationdoesnotaccountforanytariffreductionorshippinglogisticsimprovement.[22]However,totaleconomiesofscaleisbasedontheexportersindividualfrequencyandsize.Solarge-scalecompaniesaremorelikelytohavealowercostperunitasopposedtosmall-scalecompanies.Likewise,hightradefrequencycompaniesareabletoreducetheiroverallcostattributedperunitwhencomparedtothoseoflow-tradefrequencycompanies.[23] Economiesofscaleandreturnstoscale[edit] Economiesofscaleisrelatedtoandcaneasilybeconfusedwiththetheoreticaleconomicnotionofreturnstoscale.Whereeconomiesofscalerefertoafirm'scosts,returnstoscaledescribetherelationshipbetweeninputsandoutputsinalong-run(allinputsvariable)productionfunction.Aproductionfunctionhasconstantreturnstoscaleifincreasingallinputsbysomeproportionresultsinoutputincreasingbythatsameproportion.Returnsaredecreasingif,say,doublinginputsresultsinlessthandoubletheoutput,andincreasingifmorethandoubletheoutput.Ifamathematicalfunctionisusedtorepresenttheproductionfunction,andifthatproductionfunctionishomogeneous,returnstoscalearerepresentedbythedegreeofhomogeneityofthefunction.Homogeneousproductionfunctionswithconstantreturnstoscalearefirstdegreehomogeneous,increasingreturnstoscalearerepresentedbydegreesofhomogeneitygreaterthanone,anddecreasingreturnstoscalebydegreesofhomogeneitylessthanone. Ifthefirmisaperfectcompetitorinallinputmarkets,andthustheper-unitpricesofallitsinputsareunaffectedbyhowmuchoftheinputsthefirmpurchases,thenitcanbeshownthatataparticularlevelofoutput,thefirmhaseconomiesofscaleifandonlyifithasincreasingreturnstoscale,hasdiseconomiesofscaleifandonlyifithasdecreasingreturnstoscale,andhasneithereconomiesnordiseconomiesofscaleifithasconstantreturnstoscale.[24][25][26]Inthiscase,withperfectcompetitionintheoutputmarketthelong-runequilibriumwillinvolveallfirmsoperatingattheminimumpointoftheirlong-runaveragecostcurves(i.e.,attheborderlinebetweeneconomiesanddiseconomiesofscale). If,however,thefirmisnotaperfectcompetitorintheinputmarkets,thentheaboveconclusionsaremodified.Forexample,ifthereareincreasingreturnstoscaleinsomerangeofoutputlevels,butthefirmissobiginoneormoreinputmarketsthatincreasingitspurchasesofaninputdrivesuptheinput'sper-unitcost,thenthefirmcouldhavediseconomiesofscaleinthatrangeofoutputlevels.Conversely,ifthefirmisabletogetbulkdiscountsofaninput,thenitcouldhaveeconomiesofscaleinsomerangeofoutputlevelsevenifithasdecreasingreturnsinproductioninthatoutputrange. Inessence,returnstoscalerefertothevariationintherelationshipbetweeninputsandoutput.Thisrelationshipisthereforeexpressedin"physical"terms.Butwhentalkingabouteconomiesofscale,therelationtakenintoconsiderationisthatbetweentheaverageproductioncostandthedimensionofscale.Economiesofscalethereforeareaffectedbyvariationsininputprices.Ifinputpricesremainthesameastheirquantitiespurchasedbythefirmincrease,thenotionsofincreasingreturnstoscaleandeconomiesofscalecanbeconsideredequivalent.However,ifinputpricesvaryinrelationtotheirquantitiespurchasedbythecompany,itisnecessarytodistinguishbetweenreturnstoscaleandeconomiesofscale.Theconceptofeconomiesofscaleismoregeneralthanthatofreturnstoscalesinceitincludesthepossibilityofchangesinthepriceofinputswhenthequantitypurchasedofinputsvarieswithchangesinthescaleofproduction.[27] Theliteratureassumedthatduetothecompetitivenatureofreverseauctions,andinordertocompensateforlowerpricesandlowermargins,suppliersseekhighervolumestomaintainorincreasethetotalrevenue.Buyers,inturn,benefitfromthelowertransactioncostsandeconomiesofscalethatresultfromlargervolumes.Inpartasaresult,numerousstudieshaveindicatedthattheprocurementvolumemustbesufficientlyhightoprovidesufficientprofitstoattractenoughsuppliers,andprovidebuyerswithenoughsavingstocovertheiradditionalcosts.[28] However,surprisinglyenough,ShalevandAsbjornsefound,intheirresearchbasedon139reverseauctionsconductedinthepublicsectorbypublicsectorbuyers,thatthehigherauctionvolume,oreconomiesofscale,didnotleadtobettersuccessoftheauction.Theyfoundthatauctionvolumedidnotcorrelatewithcompetition,norwiththenumberofbidders,suggestingthatauctionvolumedoesnotpromoteadditionalcompetition.Theynoted,however,thattheirdataincludedawiderangeofproducts,andthedegreeofcompetitionineachmarketvariedsignificantly,andofferthatfurtherresearchonthisissueshouldbeconductedtodeterminewhetherthesefindingsremainthesamewhenpurchasingthesameproductforbothsmallandhighvolumes.Keepingcompetitivefactorsconstant,increasingauctionvolumemayfurtherincreasecompetition.[28] Economiesofscaleinthehistoryofeconomicanalysis[edit] Economiesofscaleinclassicaleconomists[edit] Thefirstsystematicanalysisoftheadvantagesofthedivisionoflabourcapableofgeneratingeconomiesofscale,bothinastaticanddynamicsense,wasthatcontainedinthefamousFirstBookofWealthofNations(1776)byAdamSmith,generallyconsideredthefounderofpoliticaleconomyasanautonomousdiscipline. JohnStuartMill,inChapterIXoftheFirstBookofhisPrinciples,referringtotheworkofCharlesBabbage(Ontheeconomicsofmachinesandmanufactories),widelyanalysestherelationshipsbetweenincreasingreturnsandscaleofproductionallinsidetheproductionunit. EconomiesofscaleinMarxanddistributionalconsequences[edit] InDasKapital(1867),KarlMarx,referringtoCharlesBabbage,extensivelyanalyzedeconomiesofscaleandconcludesthattheyareoneofthefactorsunderlyingtheever-increasingconcentrationofcapital.Marxobservesthatinthecapitalistsystemthetechnicalconditionsoftheworkprocessarecontinuouslyrevolutionizedinordertoincreasethesurplusbyimprovingtheproductiveforceofwork.AccordingtoMarx,withthecooperationofmanyworkersbringsaboutaneconomyintheuseofthemeansofproductionandanincreaseinproductivityduetotheincreaseinthedivisionoflabour.Furthermore,theincreaseinthesizeofthemachineryallowssignificantsavingsinconstruction,installationandoperationcosts.Thetendencytoexploiteconomiesofscaleentailsacontinuousincreaseinthevolumeofproductionwhich,inturn,requiresaconstantexpansionofthesizeofthemarket.[29]However,ifthemarketdoesnotexpandatthesamerateasproductionincreases,overproductioncrisescanoccur.AccordingtoMarxthecapitalistsystemisthereforecharacterizedbytwotendencies,connectedtoeconomiesofscale:towardsagrowingconcentrationandtowardseconomiccrisesduetooverproduction.[30] Inhis1844EconomicandPhilosophicManuscripts,KarlMarxobservesthateconomiesofscalehavehistoricallybeenassociatedwithanincreasingconcentrationofprivatewealthandhavebeenusedtojustifysuchconcentration.Marxpointsoutthatconcentratedprivateownershipoflarge-scaleeconomicenterprisesisahistoricallycontingentfact,andnotessentialtothenatureofsuchenterprises.Inthecaseofagriculture,forexample,Marxcallsattentiontothesophisticalnatureoftheargumentsusedtojustifythesystemofconcentratedownershipofland: Asforlargelandedproperty,itsdefendershavealwayssophisticallyidentifiedtheeconomicadvantagesofferedbylarge-scaleagriculturewithlarge-scalelandedproperty,asifitwerenotpreciselyasaresultoftheabolitionofpropertythatthisadvantage,foronething,receiveditsgreatestpossibleextension,and,foranother,onlythenwouldbeofsocialbenefit.[31] Insteadofconcentratedprivateownershipofland,Marxrecommendsthateconomiesofscaleshouldinsteadberealizedbyassociations: Association,appliedtoland,sharestheeconomicadvantageoflarge-scalelandedproperty,andfirstbringstorealizationtheoriginaltendencyinherentinland-division,namely,equality.Inthesamewayassociationre-establishes,nowonarationalbasis,nolongermediatedbyserfdom,overlordshipandthesillymysticismofproperty,theintimatetiesofmanwiththeearth,fortheearthceasestobeanobjectofhuckstering,andthroughfreelaborandfreeenjoymentbecomesoncemoreatruepersonalpropertyofman.[31] EconomiesofscaleinMarshall[edit] AlfredMarshallnotesthat"some,amongwhomCournothimself,"haveconsidered"theinternaleconomies[...]apparentlywithoutnoticingthattheirpremisesleadinevitablytotheconclusionthat,whateverfirmfirstgetsagoodstartwillobtainamonopolyofthewholebusinessofitstrade…".[32]Marshallbelievesthattherearefactorsthatlimitthistrendtowardmonopoly,andinparticular: thedeathofthefounderofthefirmandthedifficultythatthesuccessorsmayhaveinheritedhis/herentrepreneurialskills; thedifficultyofreachingnewmarketsforone'sgoods; thegrowingdifficultyofbeingabletoadapttochangesindemandandtonewtechniquesofproduction; Theeffectsofexternaleconomies,thatistheparticulartypeofeconomiesofscaleconnectednottotheproductionscaleofanindividualproductionunit,buttothatofanentiresector.[33] Sraffa'scritique[edit] PieroSraffaobservesthatMarshall,inordertojustifytheoperationofthelawofincreasingreturnswithoutitcomingintoconflictwiththehypothesisoffreecompetition,tendedtohighlighttheadvantagesofexternaleconomieslinkedtoanincreaseintheproductionofanentiresectorofactivity.However,"thoseeconomieswhichareexternalfromthepointofviewoftheindividualfirm,butinternalasregardstheindustryinitsaggregate,constitutepreciselytheclasswhichismostseldomtobemetwith.""Inanycase-Sraffanotes–insofarasexternaleconomiesofthekindinquestionexist,theyarenotlinkedtobecalledforthbysmallincreasesinproduction,"asrequiredbythemarginalisttheoryofprice.[34]Sraffapointsoutthat,intheequilibriumtheoryoftheindividualindustries,thepresenceofexternaleconomiescannotplayanimportantrolebecausethistheoryisbasedonmarginalchangesinthequantitiesproduced. Sraffaconcludesthat,ifthehypothesisofperfectcompetitionismaintained,economiesofscaleshouldbeexcluded.Hethensuggeststhepossibilityofabandoningtheassumptionoffreecompetitiontoaddressthestudyoffirmsthathavetheirownparticularmarket.[35]ThisstimulatedawholeseriesofstudiesonthecasesofimperfectcompetitioninCambridge.However,inthesucceedingyearsSraffafollowedadifferentpathofresearchthatbroughthimtowriteandpublishhismainworkProductionofcommoditiesbymeansofcommodities(Sraffa1966).Inthisbook,Sraffadeterminesrelativepricesassumingnochangesinoutput,sothatnoquestionarisesastothevariationorconstancyofreturns. Economiesofscaleandthetendencytowardsmonopoly:"Cournot'sdilemma"[edit] Ithasbeennotedthatinmanyindustrialsectorstherearenumerouscompanieswithdifferentsizesandorganizationalstructures,despitethepresenceofsignificanteconomiesofscale.Thiscontradiction,betweentheempiricalevidenceandthelogicalincompatibilitybetweeneconomiesofscaleandcompetition,hasbeencalledthe‘Cournotdilemma’.[36]AsMarioMorroniobserves,Cournot'sdilemmaappearstobeunsolvableifweonlyconsidertheeffectsofeconomiesofscaleonthedimensionofscale.[37]If,ontheotherhand,theanalysisisexpanded,includingtheaspectsconcerningthedevelopmentofknowledgeandtheorganizationoftransactions,itispossibletoconcludethateconomiesofscaledonotalwaysleadtomonopoly.Infact,thecompetitiveadvantagesderivingfromthedevelopmentofthefirm'scapabilitiesandfromthemanagementoftransactionswithsuppliersandcustomerscancounterbalancethoseprovidedbythescale,thuscounteractingthetendencytowardsamonopolyinherentineconomiesofscale.Inotherwords,theheterogeneityoftheorganizationalformsandofthesizeofthecompaniesoperatinginasectorofactivitycanbedeterminedbyfactorsregardingthequalityoftheproducts,theproductionflexibility,thecontractualmethods,thelearningopportunities,theheterogeneityofpreferencesofcustomerswhoexpressadifferentiateddemandwithrespecttothequalityoftheproduct,andassistancebeforeandafterthesale.Verydifferentorganizationalformscanthereforeco-existinthesamesectorofactivity,eveninthepresenceofeconomiesofscale,suchas,forexample,flexibleproductiononalargescale,small-scaleflexibleproduction,massproduction,industrialproductionbasedonrigidtechnologiesassociatedwithflexibleorganizationalsystemsandtraditionalartisanproduction.Theconsiderationsregardingeconomiesofscalearethereforeimportant,butnotsufficienttoexplainthesizeofthecompanyandthemarketstructure.Itisalsonecessarytotakeintoaccountthefactorslinkedtothedevelopmentofcapabilitiesandthemanagementoftransactioncosts.[37] Externaleconomiesofscale[edit] Externaleconomiesofscaletendtobemoreprevalentthaninternaleconomiesofscale.[38]Throughtheexternaleconomiesofscale,theentryofnewfirmsbenefitsallexistingcompetitorsasitcreatesgreatercompetitionandalsoreducestheaveragecostforallfirmsasopposedtointernaleconomiesofscalewhichonlyallowsbenefitstotheindividualfirm.[39]Advantagesthatarisefromexternaleconomiesofscaleinclude; Expansionoftheindustry. Benefitsmostorallofthefirmswithintheindustry. Canleadtorapidgrowthoflocalgovernments. GraphDepictingExternalEconomiesofScale Sources[edit] Purchasing[edit] Firmsareabletolowertheiraveragecostsbybuyingtheirinputsrequiredfortheproductionprocessinbulkorfromspecialwholesalers.[40] Managerial[edit] Firmsmightbeabletolowertheiraveragecostsbyimprovingtheirmanagementstructurewithinthefirm.Thiscanrangefromhiringbetterskilledormoreexperiencedmanagersfromtheindustry.[40] Technological[edit] Technologicaladvancementswillchangetheproductionprocesswhichwillsubsequentlyreducetheoverallcostperunit.[41] Seealso[edit] Economicsportal Economiesofdensity Economiesofscope Idealfirmsize Massproduction Networkeffect Notes[edit] ^Manufactureofspecialtygradesbysmallscaleproducersisacommonpracticeinsteel,paper,andmanycommodityindustriestoday.Seevariousindustrytradepublications. ^Seevariousestimatingguides,suchasMeans.Alsoseevariousengineeringeconomicstextsrelatedtoplantdesignandconstruction,etc. ^Therelationshipisrathercomplex.Seeengineeringtextsonheattransfer. ^Inpractice,capitalcostestimatesarepreparedfromspecifications,budgetgradevendorpricingforequipment,generalarrangementdrawingsandmaterialstake-offsfromthedrawings.Thisinformationisthenusedincostformulastoarriveatafinaldetailedestimate. References[edit] Citations[edit] ^O'Sullivan,Arthur;Sheffrin,StevenM.(2003).Economics:PrinciplesinAction.UpperSaddleRiver,NJ:PearsonPrenticeHall.pp. 157.ISBN 978-0-13-063085-8. ^ Landes,David.S.(1969).TheUnboundPrometheus:TechnologicalChangeandIndustrialDevelopmentinWesternEuropefrom1750tothePresent.Cambridge,NewYork:PressSyndicateoftheUniversityofCambridge.ISBN 978-0-521-09418-4.Landesdescribestheproblemofnewsteelmillsinlate19thcenturyBritainbeingtoolargeforthemarketandunabletoeconomicallyproduceshortproductionrunsofspecialtygrades.Theoldmillshadanotheradvantageinthattheywerefullyamortized. ^ ChandlerJr.,AlfredD.(1993).TheVisibleHand:TheManagementRevolutioninAmericanBusiness.BelknapPressofHarvardUniversityPress.p. 236.ISBN 978-0674940529.Chandlerusestheexampleofhighturnoverindistribution. ^Robinson(1958),pp. 22–23;Scherer(1980),pp. 82–83;Pratten(1991),pp. 16–17. ^Morroni(2006),pp. 169–170. ^Baumol(1961),p. 1. ^Morroni(2006),pp. 170–171. ^"EconomiesofScale-Definition,Types,EffectsofEconomiesofScale".CorporateFinanceInstitute.Retrieved19May2022. ^Morroni(2006),p. 166. ^Smith(1976);Pratten(1991),pp. 7,17–8Ontherelationshipbetweenbuilt-intechnicalchangeandscalegrowth,seeEvangelista(1999),chapter4. ^Demsetz(1995),pp. 11,31–32showshowtheseeconomiesofscaleintheacquisitionofspecializedknowledgeplayanessentialroleintheexistenceofthecompany. ^Scherer(1980),p. 86;Penrose(1959),pp. 92ff.;Demsetz(1995),pp. 31–2. ^Rosenberg(1982);Levinetal.(1987);Scherer(2000),p. 22. ^Penrose(1959),pp. 99–101;Morroni(2006),p. 172. ^[[Inmicroeconomics,economiesofscalearethecostadvantagesthatenterprisesobtainduetosize,output,orscaleofoperation,withcostperunitofoutputgenerallydecreasingwithincreasingscaleasfixedcostsarespreadoutovermoreunitsofoutput.Oftenoperationalefficiencyisalsogreaterwithincreasingscale,leadingtolowervariablecostaswell.Economiesofscaleapplytoavarietyoforganizationalandbusinesssituationsandatvariouslevels,suchasabusinessormanufacturingunit,plantoranentireenterprise.Forexample,alargemanufacturingfacilitywouldbeexpectedtohavealowercostperunitofoutputthanasmallerfacility,allotherfactorsbeingequal,whileacompanywithmanyfacilitiesshouldhaveacostadvantageoveracompetitorwithfewer.Someeconomies|Moore,FredrickT.]](May1959)."EconomiesofScale:SomeStatisticalEvidence"(PDF).QuarterlyJournalofEconomics.73(2):232–245.doi:10.2307/1883722.JSTOR 1883722. ^Seevariousestimatingguidesthatpublishtablesoftaskscommonlyencounteredinbuildingtradeswithestimatesoflaborhoursandcostsperhourforthetrade,oftenwithregionalpricing. ^Seevariousengineeringhandbooksandmanufacturersdata. ^Rosenberg1982,p. 63 ^Rosenberg(1982),pp. 127–128. ^Rosenberg(1982). ^Melitz,MarcJ(2003)."TheImpactofTradeonIntra-industryReallocationsandAggregateIndustryProductivity"(PDF).Econometrica.71(6):1695–1725.doi:10.1111/1468-0262.00467.Retrieved22October2020. ^abArmenter,Roc;Koren,Miklós(2015)."EconomiesofScaleandtheSizeofExporters".JournaloftheEuropeanEconomicAssociation.13(1):482–511.doi:10.1111/jeea.12108.SSRN 1448001.Retrieved23October2020. ^Baumgartner,Kerstin;Fuetterer,André;Thoneman,UlrichW(2012)."Supplychaindesignconsideringeconomiesofscaleandtransportfrequencies".EuropeanJournalofOperationalResearch.218(3):789–800.doi:10.1016/j.ejor.2011.11.032. ^Gelles,GregoryM.;Mitchell,DouglasW.(1996)."ReturnstoScaleandEconomiesofScale:FurtherObservations".JournalofEconomicEducation.27(3):259–261.doi:10.1080/00220485.1996.10844915.JSTOR 1183297. ^Frisch,R.(1965).TheoryofProduction.Dordrecht:D.Reidel. ^Ferguson,C.E.(1969).TheNeoclassicalTheoryofProduction&Distribution.London:CambridgeUniversityPress.ISBN 978-0-521-07453-7. ^Morroni(1992),p. 142;Morroni(2006),pp. 164–165. ^abShalev,MosheEitan;Asbjornsen,Stee(2010)."ElectronicReverseAuctionsandthePublicSector–FactorsofSuccess".JournalofPublicProcurement.10(3):428–452.SSRN 1727409. ^Marx(1867),pp. 432–442,469. ^Marx(1894),pp. 172,288,360–365. ^abKarlMarx,EconomicandPhilosophicManuscriptsof1844,M.Milligan,trans.(1988),p.65–66 ^Marshall(1890),380,note1;cf.Cournot(1838),pp. 96ff. ^Marshall(1890),pp. 232–238,378–380. ^Sraffa(1926),p. 49;Sraffa(1925). ^Sraffa(1926),p. 58. ^Arrow(1979),p. 156. ^abMorroni(2006),pp. 253–256. ^Broadberry,Stephen;Marrison,Andrew(2002)."ExternaleconomiesofscaleintheLancashirecottonindustry,1900–1950".TheEconomicHistoryReview.55(1):51–77.doi:10.1111/1468-0289.00214.JSTOR 3091815.Retrieved21October2020. ^Mukherjee,Arijit(2010)."ExternalEconomiesofScaleandInsufficientEntry".JournalofIndustry,CompetitionandTrade.10(3):365-371.doi:10.1007/s10842-010-0069-y.S2CID 153725116.Retrieved29October2020. ^abXue,Xiao;Wang,Shufang;Lu,Baoyun(2015)."ComputationalExperimentApproachtoControlledEvolutionofProcurementPatterninClusterSupplyChain".Sustainability.7(1):1516–1541.doi:10.3390/su7021516. ^Rajagopal(2014).Innovations,Technology,andEconomiesofScale(1 ed.).London:PalgraveMacmillan.pp. 174–199.ISBN 978-1-137-36678-8. 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Levin,RichardC.;Klevorick,AlvinK.;Nelson,RichardR.;Winter,SidneyG.(1987).Baily,M.N.;Winston,C.(eds.)."Appropriatingthereturnsfromindustrialresearchanddevelopment"(PDF).BrookingsPapersonEconomicActivity.1987(3):783–820.doi:10.2307/2534454.JSTOR 2534454.S2CID 51821102. Marshall,Alfred(1890).PrinciplesofEconomics(8 ed.).London:Macmillan.Repr.1990. Marx,Karl(1867).DasKapital[Capital.ACritiquetoPoliticalEconomy].Vol. 1.TranslatedbyFowkes,Ben.London:PenguinBooksinassociationwithNewLeftReview.Repr.1990. Marx,Karl(1894).DasKapital[Capital.ACritiquetoPoliticalEconomy].Vol. 3.TranslatedbyFernbach,DavidB.;introducedbyMandel,Ernest.London:PenguinBooksinassociationwithNewLeftReview. Morroni,Mario(1992).ProductionProcessandTechnicalChange.Cambridge:CambridgeUniversityPress.ISBN 9780511599019. Morroni,Mario(2006).Knowledge,ScaleandTransactionsintheTheoryoftheFirm.Cambridge:CambridgeUniversityPress.ISBN 9781107321007.Repr.2009. Panzar,John;Willig,RobertD.(August1977)."EconomiesofScaleinMulti-OutputProduction".TheQuarterlyJournalofEconomics.91(3):481–493.doi:10.2307/1885979.JSTOR 1885979. Penrose,Edith(1959).TheTheoryoftheGrowthoftheFirm(3 ed.).Oxford:OxfordUniversityPress.ISBN 9780198289777.Repr.(1997). Pratten,CliffordFrederick(1991).TheCompetitivenessofSmallFirms.Cambridge:CambridgeUniversityPress. Robinson,Austin(1958)[1931].TheStructureofCompetitiveIndustry.Cambridge:CambridgeUniversityPress. Rosenberg,Nathan(1982)."Learningbyusing".InsidetheBlackBox.TechnologyandEconomics.Cambridge:CambridgeUniversityPress. Scherer,F.M.(1980).IndustrialMarketStructureandEconomicPerformance(2 ed.).Chicago:RandMcNally.ISBN 9780528671029. Scherer,F.M.(2000)."ProfessorSutton's'Technologyandmarketstructure'".TheJournalofIndustrialEconomics.48(2):215–223.doi:10.1111/1467-6451.00120. Silvestre,Joaquim(1987)."EconomiesandDiseconomiesofScale".TheNewPalgrave:ADictionaryofEconomics.Vol. 2.London:Macmillan.pp. 80–84.ISBN 978-0-333-37235-7. Smith,Adam(1976)[1776].AnInquiryintotheNatureandCausesoftheWealthofNations.Vol. 2.Oxford:ClarendonPress. Sraffa,Piero(1925)."Sullerelazionitracostoequantitàprodotta".AnnalidiEconomia(inItalian).2:277–328.Englishtranslation:Sraffa,Piero(1998)."Ontherelationsbetweencostandquantityproduced".ItalianEconomicPapers.VolumeIII.TranslatedbyPasinetti,L.L.(1998 ed.).Bologna:SocietàItalianadegliEconomisti,OxfordUniversityPress,IlMulino.ISBN 978-0198290346.Repr.inKurz,H.D.;Salvadori,N.(2003).TheLegacyofPieroSraffa.Vol. 2(2003 ed.).Cheltenham:AnElgarReferenceCollection.pp. 3–43.ISBN 978-1-84064-439-5. Sraffa,Piero(December1926)."Thelawofreturnsundercompetitiveconditions".TheEconomicJournal.36(144):535–550.doi:10.2307/2959866.JSTOR 2959866.S2CID 6458099.Repr.inKurz,H.D.;Salvadori,N.(2003).TheLegacyofPieroSraffa.Vol. 2(2003 ed.).Cheltenham:AnElgarReferenceCollection.pp. 44–59.ISBN 978-1-84064-439-5. Sraffa,Piero(1966).ProductionofCommoditiesbyMeansofCommodities.PreludetoaCritiqueofEconomicTheory.Cambridge:CambridgeUniversityPress.ISBN 978-0521099691. Zelenyuk,V.(2013)."Ascaleelasticitymeasurefordirectionaldistancefunctionanditsdual:TheoryandDEAestimation".EuropeanJournalofOperationalResearch.228(3):592–600.doi:10.1016/j.ejor.2013.01.012. Zelenyuk,V.(2014)."Scaleefficiencyandhomotheticity:equivalenceofprimalanddualmeasures".JournalofProductivityAnalysis.42(1):15–24.doi:10.1007/s11123-013-0361-z.S2CID 122978026. Externallinks[edit] WikiquotehasquotationsrelatedtoEconomiesofscale. 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