Types of economy of scale

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  • Created by: izzy
  • Created on: 10-06-13 11:50

Technical economies of scale

  • Indivisibilities. Many types of plant or machinery are indivisible in the sense that there is a certain minimum size below which the cannot efficiently operate. A firm requiring only a small level of output must, therefore, choose between installing plant or machinery which it will be unable to use continuously, buying from an outside supplier, or using a different but less efficient method to produce the smaller required level of output.
  • The spreading of research and development costs. Research and development (R&D) costs associated with new products also tend to be indivisible and independent of the size of output to be produced. With large plants, R&D costs can be spread over a much longer production run, reducing unit costs in the long run.
  • Volume economies. These are also known as economies of increased dimensions. With many types of capital equipment (for example melter smelter, transport containers, storage tanks and warehouses) , costs increase less rapidly than capacity. When a storage tank or boiler is doubled in dimension, its storage capacity increases eight-fold. And since heat loss depends on the area of the container's walls (which will only have increased four-fold) and not upon volume, a large smelter or boiler is technically more efficient than a small one. Volume economies are thus very important in industries such as transport, storage and warehousing, as well as in metal and chemical industries where an increase in the scale of plant provides scope for the conservation of heat and energy.
  • Economies of massed resources. The operation of a number of identical machines in a large plant means that proportionately fewer spare parts need be kept than when fewer machines are involved. This is an application of the 'law of large numbers', since we can…

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