Economies of Scale Notes

Notes that define economies of scale as the advantages of large-scale production which lower average cost, expressed as average cost equal to total cost over output, and divide them into pecuniary and real economies. Pecuniary economies come from paying lower prices for factors as the firm grows: discounts on large-scale operations, special discounts on raw materials, lower interest on loans, cheaper advertising and lower transport rates. Real economies reduce the physical quantity of inputs consumed and are grouped into production, selling and marketing, managerial, and transport and storage economies. Production economies are then broken down by factor, covering division of labour and specialisation, the time saved by not switching tasks, automation of the production process, cumulative volume effects, and inventory or stochastic economies, where stock absorbs random movement in inputs and outputs and cushions the loss from a breakdown.