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Economies Of Scale

  Economies of scale refers to the benefits of mass production. In many industries, big is beautiful (or anyway cheaper) because unit costs of production fall; for example the mass-production of cars; giant shipbuilding yards; steel works, where initial investment costs are heavy and can be lightened only if output is expanded.

All processes have an optimal level of output beyond which efficiency falls, however, often because of managerial problems. Large-scale production can become inflexible, and can be slow to innovate because of heavy investment costs.

Decreases in average costs occur as manufacturing plants and firms grow larger, that is, falling long-run, average costs when all factor inputs are increased. This situation may occur because certain kinds of equipment are very large in their minimum efficient size. Or, different and more efficient arrangements and techniques of production may be utilized as the plant or firm grows larger. Adam Smith identified specialization and division of labour as causes of economies of scale. TF

Further reading Alfred D. Chandler, Scale and Scope: the Dynamics of Industrial Capitalism; , Michael E. Porter, The Competitive Advantage of Nations.



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