Economic Economies of Scale

Economies of scale refer to a firm’s costs. The reductions of a firms average total cost of producing a product as the firm expands the size of the firm. Economies of scale have to do with the long run average total cost of the firm. Economies of scale (economies of mass production) lower the average total cost of production in the long run as plant size increases for a period of time.

Factors that lead to lower average cost of production are labor specialization, managerial specialization, efficient capital, and other factors. Labor specialization increases as plant size increases. Hiring more workers means that labor can be specialized. It can be divided and subdivided. As the number of workers increase they can focus on a few tasks as opposed to having six or seven tasks to do. Workers can focus full time on the task they have specialized skills in. A small plant on the other hand may need skilled workers to perform unskilled work which will lead to higher production costs. Workers become more efficient and proficient as they focusing on fewer tasks. Finally specialization increases time management and eliminates the loss of time that accompanies a worker having to change from task to task.

Managerial specialization is another area which lowers average total cost of production. A manager that is highly specialized and can handle 20 employees may be under utilized in a smaller firm if they are managing only half that number of employees. In a smaller firm the production can be increased by increasing labor without any additional labor cost for management. Small firms are not able to utilize management specialization as a sales professional may have to manage their time between different executive functions while selling, such as personnel, finance and marketing. A larger firm can allocate labor to focus and specialize on each managerial function. The cost to produce each additional unit will decrease and produce greater production efficiency.

Larger firms tend to have efficient capital to purchase the most efficient equipment which is expensive and usually only available to larger firms. Large machinery and equipment require a high volume of production to be utilized efficiently. Smaller firms would not be able to produce high volumes to utilize large machinery and equipment.

An example of this idea would be the automotive industry. The industry utilizes efficient robotics and specialized assembly line equipment. Utilization of this type of equipment would require a mass number of outputs. The fabrication of automobiles utilizing any other equipment would be inefficient and cost the firm more in production cost.

Other factors that producers have to manage are startup, design and development cost. These costs are incurred regardless of the projected and expected sales. These costs are decreased as the number of outputs increase. Increasing output lowers costs because these expenses are divided by the number of outputs. Also a firms advertising cost decreases as the number of outputs increase. Economies of scale are further increased as firms output is increased. As firms sell more their marketing and production expertise usually increase as they learn by doing.

These are the factors that lower a firms average total cost as a firm expands its operations. Average total costs become lower when the percentage of output increases faster than the percentage of production resources.

Firms that grow and utilize economies of scale increase their potential to thrive in the 21st century. Smaller firms unable to expand can expect to struggle with higher production costs.