Economies of scale

Also known as: Law of mass production, economies of scale

In production theory, the ratio of the production volume to the amount of production factors used is determined as an economies of scale. The economies of scale, also known as “economies of scale” or “economies of scale”, describe the fact when the intensification of the production factors increases the output.
Ideally, the production and cost costs decrease as the production volume increases. Depending on the relationship between input and output, there are three types of economies of scale: constant, negative and positive.

Types of economies of scale

Constant economies of scale - A constant economies of scale takes place when the number of goods produced remains the same as the number of goods used Factors of production developed. The scale elasticity is equal to 1. In practice, such an effect rarely occurs.

Negative economies of scale - There is a negative scale effect with a scale elasticity below 1. Despite the higher input, the production volume does not increase.

In the literature, agriculture is often referred to as an example of a negative scale development: Despite higher inputs of production resources (including fertilizers), the yield cannot be increased proportionally due to the nature of the soil.

Positive economies of scale - In contrast to the negative scale effect, one speaks of a positive scale effect if the production volume increases more than the production factors used - the scale elasticity is therefore above 1.

In practice, economies of scale are usually understood to be a positive effect - the production volume increases more than the increase in the factors introduced.

Causes / reasons of economies of scale

One reason for a positive scale development is, among other things, when production costs fall due to savings (for example in mass production).

Reasons for lower production costs include decreasing average costs, Division of labor, Standardization, rationalization, learning curve effects or consolidation of operating locations. Further reasons for positive economies of scale are efficiency gains, marketing advantages, purchasing power and fixed cost degression.

A classic example of a positive economies of scale is specialization through automation in the automotive industry at the beginning of the 20th century.

With the introduction of assembly line production, production costs have fallen massively and production figures have increased at the same time. In relation to the amount of production to the amount of production factors used, the scale elasticity is over 1.

Summary

  • Relationship between production volume (= output) and the production factors used (= input)
  • with an intensification of the production factors also increase the production volume
  • can have a negative, constant or positive ratio (= scale elasticity)
  • often used in practice as a positive economies of scale
  • important for a company's growth goals (e.g. cost or price leadership)
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