Economies of scale

If over a period of time the short run average cost becomes lower due to a number of reasons, a firm gains benefits through this expansion. These benefits of producing on a larger scale are called economies of scale.

There are internal and external economies of scale. Internal EoS's happen due to decisions made within a firm, and External EoS's happen due to reasons which are not dependant on a firm's actions.

Technical EoS's are internal, they are achieved by improving the technology or increasing capacity. They usually result in LRAC.
Purchasing EoS's are achieved when a firm bulk buys something - a purchase of materials or capital in big quantitites usually gives an opportunity to have a discount, so average variable cost will fall.

Managerial EoS's are due to specialisation of the employees. It's easier to employ a multi-task manager, but it will be more efficient if there is at least one manager in different departments such as finance, human resources, marketing etc. Obviously, this type of EoS is also internal.

Now, about external economies of scale. They are available when the whole industry grows.

Transport and communication links improve, for instance, building of new roads and motorways, which make it easier to get from A to B. Maybe improvement of quality of roads will reduce sunk costs which arise from damages of vechicals on bad roads.

Training and education. For instance, more unis offer courses closely tighted with the transport industry, so more specialists join the industry, so labour supply increases and firms are able to employ specialists in exchange for lower wages, because there will be a competition among the potential job holders. Or the government might provide some support for people going to transport industry by offering special trainin courses etc.

Grow of other industries, which are connected with the industry. Maybe suppliers of the materials extend and have a branch near the firm hence lower material costs. It enables to find a high-quality supplier for a cheaper price.

1 comment:

chris sivewright said...

If a firm gets economies of scale, why does the supply curve slope UP?

Is this the same as economies of scope?