EconGuru Economics Guide » Economies of scale

Economies of scale

Economies of scale is a production process characterized by a pattern that an increase in the number of units produced incurs a decrease in the average total cost of each unit. It's the reason and temptation to be big, putting big firms in advantageous position over smaller ones.

Oppositely, at a production level of diseconomies of scale, average total cost increases as more units are produced.

As the 2 forces come to a balance, the ideal production volume is found, explaining why firms in a particular industry tend to be similar sizes.

There are basically 2 types of economies of scale. First, internal economies of scale refers to the fact that a firm can lower the average total cost of its product by expanding the capacity of production. The second concept of external economies of scale occur when a firm benefits from lower cost as a result of related or supporting industries growing in size. However, some researchers attribute this to economies of scope.