economies of scale

(noun)

The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.

Related Terms

Examples of economies of scale in the following topics:

  • Economies of Scale and Network Externalities

    • Economies of scale and network externalities discourage potential competitors from entering a market.
    • Economies of scale and network externalities are two types of barrier to entry.
    • A natural monopoly arises as a result of economies of scale.
    • Large firms obtain economies of scale in part because fixed costs are spread over more units of output.
    • Define Economies of Scale., Explain why economies of scale are desirable for monopolies

  • Infant Industry Argument

    • Economic markets are inherently competitive, and newer economies are highly vulnerable to their more developed counterparts in other countries for a variety of reasons.
    • The primary advantage to countries with higher economic power and bigger corporations is simply economies of scale and economies of scope, in addition to being further along the experience curve.
    • The reason for this is quite simply the significant jump in prosperity as international trade expanded, and the huge capacity for specialization, economies of scale, technology sharing, and a host of other advantages that have been a direct result of free global markets.
    • The problem still remains, however, that this prosperity is often unregulated and of the greatest benefit to the influential players in established economies, sometimes at the expense of exploitation of developing nations (cheaper labor, reduced governmental oversight, etc.).
    • The basic premise behind economies of scale is that higher production quantity reduces cost per unit, ultimately allowing for the derivation of economic advantage in the market.

  • Economies and Diseconomies of Scale

    • In economics, returns to scale describes what happens when the scale of production increases over the long run when all input levels are variable (chosen by the firm).
    • Returns to scale vary between industries, but typically a firm will have increasing returns to scale at low levels of production, decreasing returns to scale at high levels of production, and constant returns to scale at some point in the middle .
    • The final stage, diminishing returns to scale (DRS) refers to production for which the average costs of output increase as the level of production increases.
    • This graph shows that as the output (production) increases, long run average total cost curve decreases in economies of scale, constant in constant returns to scale, and increases in diseconomies of scale.
    • Identify the three types of returns to scale and describe how they occur

  • Entry Barriers

    • The term can refer to hindrances a firm faces in trying to enter a market or industry—such as government regulation and patents, or a large, established firm taking advantage of economies of scale—or those an individual faces in trying to gain entrance to a profession—such as education or licensing requirements.
    • The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy new entrants.
    • In industrialized economies, barriers to entry have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization.
    • For example, there are now only a small number of manufacturers of civil passenger aircraft.
    • Explain the necessity of entry barriers for the existence of an oligopoly

  • Production and Cost in the Long-run

    • The terms "economies of scale," "increasing returns to scale," "constant returns to scale," "decreasing returns to scale" and "diseconomies of scale" are frequently used.
    • It is sometimes referred to as economies of scale or economies of mass production.
    • Not all these forces are actually economies of scale.
    • This is not economies of scale, it is a transfer of income or wealth from one group to another.
    • In Figure V.9 economies of scale are said to exist up to output QLC.

  • Benefits of Specialization

    • However, specialization can have both positive and negative effects on a nation's economy.
    • Greater efficiency: Countries specialize in areas that they are naturally good at and also benefit from increasing returns to scale for the production of these goods.
    • They benefit from economies of scale, which means that the average cost of producing the good falls (to a certain point) because more goods are being produced .
    • Opportunities for competitive sectors: Firms gain access to the whole world market, which allows them to grow bigger and to benefit further from economies of scale.
    • Threats to uncompetitive sectors: Some parts of the economy may not be able to compete with cheaper or better imports.

  • Macroeconomics

    • Macroeconomics is the study of the performance, structure, behavior and decision-making of an economy as a whole.
    • Macroeconomics is the study of the performance, structure, behavior and decision-making of an economy as a whole .
    • Macroeconomists focus on the national, regional, and global scales.
    • Sustainability occurs when an economy achieves a rate of growth which allows an increase in living standards without undue structural and environmental difficulties.
    • Macroeconomics studies the performance of national or global economies and the interaction of certain entities at the these level.

  • Key Differences

    • Microeconomics focuses on individual markets, while macroeconomics focuses on whole economies.
    • The main difference between microeconomics and macroeconomics is scale.
    • Macroeconomics is the study of economies on the national, regional or global scale.
    • While macroeconomists study the economy as a whole, microeconomists are concerned with specific firms or industries.
    • Adam Smith's book, Wealth of Nations, was the basis of both microeconomic and macroeconomic study.

  • Defining and Measuring Income Inequality

    • As a result, a wide array of income inequality scales and metrics have been generated in order to identify challenges.
    • Gini Index: One of the most commonly used income inequality metric is the Gini Index, which uses a straightforward 0-1 scale to illustrate deviance from perfect equality of income.
    • A 1 on this scale is essentially socialism, or the perfect distribution of capital/goods.
    • The share of the overall economy occupied by these two groups demonstrates substantial variance from economy to economy, and serves as a strong method to identify how drastic the inequity is.
    • In a perfectly equal economy this would equate to income levels, and the deviance from this (on a percentile scale) is representative of the inequality in the system.

  • The Role of the Financial System

    • An economy that relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy, in contrast either to a command economy or to a non-market economy such as a gift economy.
    • Financial markets are associated with the accelerated growth of an economy.
    • A financial market helps to achieve the following non-comprehensive list of goals:
    • Equity markets are the most closely followed of the financial markets.
    • They provide transparent and active trading platforms that promote liquidity and access to funds to on a global scale.