Types of economies of scale (1)
Here is a quick description of three sources of internal economies of scale:
- Specialisation. As the output of the firm increases, each worker can become more specialised in discrete parts of the production process. As each worker becomes more specialised, their efficiency increases.
- Economies of increased dimensions. As output increases, the firm will need to increase the capacity of storage, transport or production space. As the result of a simple geometric relationship, doubling the dimensions of a warehouse will result in a greater than doubling increase to capacity. The capacity of the firm will increase more rapidly than the costs of increasing the dimensions. This can also mean it is better for a firm to bring production to a single location, as increasing dimensions of an existing production facility may be more efficient than having two separate (and smaller) production sites.
- Indivisibility. This occurs when a firm requires a minimum amount of input to operate, and as output increases, the cost of any inputs can be spread over a greater output. As a result, average cost falls as output increases. For instance, consider a steel works: making steel involves using a blast furnace, which has a big cost whether a small or large amount of steel is produced. A furnace is not divisible, so economies of scale are gained when output is increased and the furnace is used more efficiently.