Economies of Scale and the Resource Mix

Revision slides that begin from the unit cost formula, total production cost in a period divided by total output in units, and the economies of scale that arise when unit costs fall as output rises. External economies are shown to come from the industry as a whole rather than the firm, often clustered geographically, through specialist suppliers close at hand, shared research and development facilities and a pool of skilled labour to draw on. The second half weighs labour-intensive against capital-intensive production, setting the greater productivity, quality and speed and lower labour cost of capital intensity against the investment required, the risk of obsolescence and resistance to change from the workforce, and the flexibility, multi-skilling and continuous improvement of labour intensity against training cost and labour turnover, closing on diseconomies from machinery and employee breakdown at high capacity utilisation and loss of management focus.