Editing Economies of scale (section)

==Determinants of economies of scale==
===Physical and engineering basis: economies of increased dimension===
Some of the economies of scale recognized in engineering have a physical basis, such as the [[square–cube law]], by which the surface of a vessel increases by the square of the dimensions while the volume increases by the cube. This law has a direct effect on the capital cost of such things as buildings, factories, pipelines, ships and airplanes.{{efn|See various estimating guides, such as Means. Also see various engineering economics texts related to plant design and construction, etc.}}

In structural engineering, the strength of [[Beam (structure)|beams]] increases with the cube of the thickness.

[[Drag (physics)|Drag]] loss of vehicles like aircraft or ships generally increases less than proportional with increasing cargo volume, although the physical details can be quite complicated. Therefore, making them larger usually results in less fuel consumption per ton of cargo at a given speed.

Heat loss from industrial processes vary per unit of volume for pipes, tanks and other vessels in a relationship somewhat similar to the square–cube law.{{efn|The relationship is rather complex. See engineering texts on heat transfer.}}{{sfnmp|Robinson|1958|1pp=22-23|Scherer |1980|2pp=82–83|Pratten|1991|3pp=16-17}} In some productions, an increase in the size of the plant reduces the average variable cost, thanks to the energy savings resulting from the lower dispersion of heat.

Economies of increased dimension are often misinterpreted because of the confusion between indivisibility and three-dimensionality of space. This confusion arises from the fact that three-dimensional production elements, such as pipes and ovens, once installed and operating, are always technically indivisible. However, the economies of scale due to the increase in size do not depend on indivisibility but exclusively on the three-dimensionality of space. Indeed, indivisibility only entails the existence of economies of scale produced by the balancing of productive capacities, considered above; or of increasing returns in the utilisation of a single plant, due to its more efficient use as the quantity produced increases. However, this latter phenomenon has nothing to do with the economies of scale which, by definition, are linked to the use of a larger plant.{{sfnp|Morroni|2006|pp=169-170}}

===Economies in holding stocks and reserves===
At the base of economies of scale there are also returns to scale linked to statistical factors. In fact, the greater of the number of resources involved, the smaller, in proportion, is the quantity of reserves necessary to cope with unforeseen contingencies (for instance, machine spare parts, inventories, circulating capital, etc.).{{sfnp|Baumol|1961|p=1}}

===Transaction economies===
One of the reasons firms appear is to [[The Nature of the Firm|reduce transaction costs]]. A larger scale generally determines greater bargaining power over input prices and therefore benefits from pecuniary economies in terms of purchasing raw materials and intermediate goods compared to companies that make orders for smaller amounts. In this case, we speak of pecuniary economies, to highlight the fact that nothing changes from the "physical" point of view of the returns to scale. Furthermore, supply contracts entail fixed costs which lead to decreasing average costs if the scale of production increases.{{sfnp|Morroni|2006|pp= 170-171}} This is of important utility in the study of [[corporate finance]].<ref>{{cite web |title=Economies of Scale - Definition, Types, Effects of Economies of Scale |url=https://corporatefinanceinstitute.com/resources/knowledge/economics/economies-of-scale/ |publisher=Corporate Finance Institute |access-date=19 May 2022}}</ref>

===Economies deriving from the balancing of production capacity===
Economies of productive capacity balancing derives from the possibility that a larger scale of production involves a more efficient use of the production capacities of the individual phases of the production process. If the inputs are indivisible and complementary, a small scale may be subject to idle times or to the underutilization of the productive capacity of some sub-processes. A higher production scale can make the different production capacities compatible. The reduction in machinery idle times is crucial in the case of a high cost of machinery.{{sfnp|Morroni|2006|p=166}}

===Economies resulting from the division of labour and the use of superior techniques===
A larger scale allows for a more efficient division of labour. The economies of division of labour derive from the increase in production speed, from the possibility of using specialized personnel and adopting more efficient techniques. An increase in the division of labour inevitably leads to changes in the quality of inputs and outputs.<ref>{{harvp|Smith|1976}}; {{harvp|Pratten|1991|pp=7, 17-8}} On the relationship between built-in technical change and scale growth, see {{harvp|Evangelista|1999|loc=chapter 4}}.</ref>

===Managerial economics===
Many administrative and organizational activities are mostly cognitive and, therefore, largely independent of the scale of production.<ref>{{harvp|Demsetz|1995|pp=11, 31-32}} shows how these economies of scale in the acquisition of specialized knowledge play an essential role in the existence of the company.</ref> When the size of the company and the division of labour increase, there are a number of advantages due to the possibility of making organizational management more effective and perfecting accounting and control techniques.{{sfnmp|Scherer|1980|1p=86|Penrose|1959|2pp=92 ff.|Demsetz|1995|3pp=31-2}}  Furthermore, the procedures and routines that turned out to be the best can be reproduced by managers at different times and places.

===Learning and growth economies===
[[Learning-by-doing (economics)|Learning]] and [[Economic growth|growth economies]] are at the base of dynamic economies of scale, associated with the process of growth of the scale dimension and not to the dimension of scale per se. Learning by doing implies improvements in the ability to perform and promotes the introduction of incremental innovations with a progressive lowering of average costs.{{sfnmp|1a1=Rosenberg|1y=1982 |2a1=Levin|2a2=Klevorick|2a3=Nelson|2a4=Winter|2y=1987 |3a1=Scherer|3y=2000|3p=22}} Learning economies are directly proportional to the cumulative production ([[Experience curve effects|experience curve]]).
Growth economies emerge if a company gains an added benefit by expanding its size. These economies are due to the presence of some resource or competence that is not fully utilized, or to the existence of specific market positions that create a differential advantage in expanding the size of the firms. That growth economies disappear once the scale size expansion process is completed. For example, a company that owns a supermarket chain benefits from an economy of growth if, opening a new supermarket, it gets an increase in the price of the land it owns around the new supermarket. The sale of these lands to economic operators, who wish to open shops near the supermarket, allows the company in question to make a profit, making a profit on the revaluation of the value of building land.{{sfnmp|Penrose|1959|1pp=99-101|Morroni|2006|2p=172}}

===Capital and operating cost===
Overall costs of capital projects are known to be subject to economies of scale. A crude estimate is that if the capital cost for a given sized piece of equipment is known, changing the size will change the capital cost by the 0.6 power of the capacity ratio (the [[#Rule of six-tenths|point six to the power rule]]).<ref name=":0">{{Cite journal
 | last = Moore
 | first =Fredrick T. <!-- | =In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well. Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise. For example, a large manufacturing facility would be expected to have a lower cost per unit of output than a smaller facility, all other factors being equal, while a company with many facilities should have a cost advantage over a competitor with fewer. Some economies-->
 | title = Economies of Scale: Some Statistical Evidence
 | date = May 1959
|journal=[[Quarterly Journal of Economics]]
|volume=73
|issue=2
|pages=232–245
|doi=10.2307/1883722
|url=http://msuweb.montclair.edu/~lebelp/MooreEcsScaleQJE1959.pdf
| jstor =1883722
 }}</ref>{{efn|In practice, capital cost estimates are prepared from specifications, budget grade vendor pricing for equipment, general arrangement drawings and materials take-offs from the drawings. This information is then used in cost formulas to arrive at a final detailed estimate.}}

In estimating capital cost, it typically requires an insignificant amount of labor, and possibly not much more in materials, to install a larger capacity electrical wire or pipe having significantly greater capacity.<ref>See various estimating guides that publish tables of tasks commonly encountered in building trades with estimates of labor hours and costs per hour for the trade, often with regional pricing.</ref>

The cost of a unit of capacity of many types of equipment, such as electric motors, centrifugal pumps, diesel and gasoline engines, decreases as size increases. Also, the efficiency increases with size.<ref>See various engineering handbooks and manufacturers' data.</ref>

===Crew size and other operating costs for ships, trains and airplanes===

Operating crew size for ships, airplanes, trains, etc., does not increase in direct proportion to capacity.{{sfn|Rosenberg|1982|p=[https://archive.org/details/insideblackboxte00rose/page/63 63]|ps= <Specifically mentions ships.>}}  (Operating crew consists of pilots, co-pilots, navigators, etc. and does not include passenger service personnel.)  Many aircraft models were significantly lengthened or "stretched" to increase payload.{{sfnp|Rosenberg|1982|pp=127–128}}

Many manufacturing facilities, especially those making bulk materials like chemicals, refined petroleum products, cement and paper, have labor requirements that are not greatly influenced by changes in plant capacity.  This is because labor requirements of automated processes tend to be based on the complexity of the operation rather than production rate, and many manufacturing facilities have nearly the same basic number of processing steps and pieces of equipment, regardless of production capacity.

===Economical use of byproducts===

[[Karl Marx]] noted that large scale manufacturing allowed economical use of products that would otherwise be waste.{{sfnp|Rosenberg|1982}}  Marx cited the chemical industry as an example, which today along with petrochemicals, remains highly dependent on turning various residual reactant streams into salable products.  In the pulp and paper industry, it is economical to burn bark and fine wood particles to produce [[process steam]] and to recover the spent pulping chemicals for conversion back to a usable form.

===Economies of scale and the size of exporter===
Large and more productive firms typically generate enough net revenues abroad to cover the fixed costs associated with exporting.<ref>{{cite journal |last1=Melitz |first1=Marc J |title=The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity |journal=Econometrica |date=2003 |volume=71 |issue=6 |pages=1695–1725 |doi=10.1111/1468-0262.00467 |url=https://scholar.harvard.edu/files/melitz/files/aggprod_ecma.pdf |access-date=22 October 2020}}</ref> However, in the event of trade liberalization, resources will have to be reallocated toward the more productive firm, which raises the average productivity within the industry.<ref name=ArmenterKoren>{{cite journal |last1=Armenter |first1=Roc |last2=Koren |first2=Miklós |title=Economies of Scale and the Size of Exporters |journal=Journal of the European Economic Association |date=2015 |volume=13 |issue=1 |pages=482–511 |doi=10.1111/jeea.12108 |ssrn=1448001 |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1448001 |access-date=23 October 2020}}</ref>

Firms differ in their labor productivity and the quality of their products, so more efficient firms are more likely to generate more net income abroad and thus become exporters of their goods or services. There is a correlating relationship between a firm's total sales and underlying efficiency. Firms with higher productivity will always outperform a firm with lower productivity which will lead to lower sales. Through trade liberalization, organizations are able to drop their trade costs due to export growth. However, trade liberalization does not account for any tariff reduction or shipping logistics improvement.{{R|ArmenterKoren}} However, total economies of scale is based on the exporters individual frequency and size. So large-scale companies are more likely to have a lower cost per unit as opposed to small-scale companies. Likewise, high trade frequency companies are able to reduce their overall cost attributed per unit when compared to those of low-trade frequency companies.<ref>{{cite journal |last1=Baumgartner |first1=Kerstin |last2=Fuetterer |first2=André |last3=Thoneman |first3=Ulrich W |title=Supply chain design considering economies of scale and transport frequencies |journal=European Journal of Operational Research |year=2012 |volume=218 |issue=3 |pages=789–800 |doi=10.1016/j.ejor.2011.11.032 }}</ref>