# Economies of scale

As scale effect ( English economies of scale ) is used in the production theory , the business administration and in the Mikroökonomie the dependence of the production quantity of the amount of the employed production factors defined.

## General

The economies of scale are the result of using the law of mass production ; Economies of scale require mass production. In order to achieve degression of fixed costs , the production volume ( English output ) is expanded in companies to the existing capacity limit with decreasing fixed unit costs . If the capacity even by expansion investment increases, the set of scale growing operation amount of scale in the form of increasing returns to scale ( englisch economies of scale ) continued. Therefore, the law of mass production encourages companies to organic business growth at, thus increasing the market share (and market power can be increased). The more mass production is expanded, the more a company can lower the market price of these mass products (with a constant profit margin ). Since the production of larger quantities allows lower cost-covering prices, cutthroat competition emerges , which theoretically ends in the so-called natural monopoly . A further cause of economies of scale can be a specialization that increases productivity .

The (marginal) return to scale corresponds to the slope of the level production function . It shows the amount by which the production volume changes if the use of all production factors (marginally) is increased by a certain factor . In contrast, one speaks of marginal productivity ( marginal yield ) in the case of partial factor variation, i.e. when a factor is changed marginally in terms of quantity. Economies of scale are also distinguished from the composite effects ( English economies of scope ) and density advantages ( English economies of density ).

## species

We speak of constant economies of scale when an increase in the input factors by a given factor results in an increase in the production volume by the same factor ( scale elasticity equal to 1), i.e. when the following applies to the production function : ${\ displaystyle x_ {1}, x_ {2}, \ dotsc}$ ${\ displaystyle f}$

${\ displaystyle f (a \ cdot x_ {1}, a \ cdot x_ {2}, \ dotsc, a \ cdot x_ {n}) = a \ cdot f (x_ {1}, x_ {2}, \ dotsc , x_ {n})}$

Such a result can be expected, for example, if a certain production technique is used on a larger scale. To the same extent as the input quantities of the input factors then increase, the output quantity of the end product also increases.

Of economies of scale (also increasing returns to scale , economies of scale or mass production benefits ) is when the volume of production increases more than the set factors (scale elasticity greater than 1):

${\ displaystyle f (a \ cdot x_ {1}, a \ cdot x_ {2}, \ dotsc, a \ cdot x_ {n})> a \ cdot f (x_ {1}, x_ {2}, \ dotsc , x_ {n})}$

For business practice, the case of positive economies of scale is particularly interesting, with marginal costs falling with the production volume : In the case of relatively low production volumes, both the unit costs of an individual item or production unit and the marginal costs (i.e. the costs of the last produced Unit) relatively high. Both decrease with increasing production volume. Expressed mathematically:

${\ displaystyle {\ frac {\ partial K ^ {'}} {\ partial q}} = {\ frac {\ partial ^ {2} K} {\ partial q ^ {2}}} <0}$

Here stand for the marginal costs and for the amount created. Accordingly, the marginal costs decrease with every additional unit produced . ${\ displaystyle K ^ {'}}$${\ displaystyle q}$${\ displaystyle K ^ {'}}$${\ displaystyle q}$

Positive economies of scale , i.e. falling marginal costs, are the economic explanation for mass production .

But they also occur in the production of many goods of the network industries such as local public transport or electricity . In branches of industry with unlimited increasing economies of scale, the complete competition (which can only be found in theory) means that no production company can cover its manufacturing costs (which can also be proven purely mathematically). Therefore, there is often a (often state) natural monopoly in such industries .

Negative economies of scale (or falling returns to scale , diseconomies of scale ) (scale elasticity less than 1) occur, for example, in agricultural production when, with increasing use of production factors such as labor and fertilizers, it is no longer possible to increase returns by the same factor.

## Causes for positive economies of scale

Positive economies of scale can be attributed to savings in mass production:

• Use of non-human or non-animal labor: use of wind and water power, steam engines, and combustion and electric motors.
• Advantages from the division of labor, in which complex processes are broken down into simple, easily repetitive activities
• Falling average costs: The proportion of fixed costs in the costs per unit decreases with a higher number of units. This applies to the cost of developing a product, for example. If a total of ten pieces of a product are sold, then each piece must nominally bear 10% of the development costs. If, on the other hand, 1000 pieces are sold, each piece only bears 0.1% of the development costs .
• Savings by using larger means of production, such as B. larger ovens, tanks and pipes (double pipe diameter only costs twice as much material, but has four times the cross-sectional area and therefore four times the capacity)
• Larger quantities behave statistically more evenly and are therefore easier to plan
• Rationalization through the use of automated production equipment ( industrial robots )
• Use of standardized parts and centralized reserve management
• Improved lot size coordination for successive planning levels
• Learning curve effects (strictly speaking, this is not an effect of scale, as it is based on the constancy of the production technology, while the learning curve effect typically undergoes changes)
• Consolidation of operating locations
• The "production" of immaterial goods (music, software), which, after a possibly high initial investment, can be reproduced more cheaply than material goods

## consequences

Positive economies of scale, in conjunction with other factors, can establish a “ natural monopoly ”. They are also mentioned as the reason for corporate concentrations. With positive economies of scale, a company with a capital investment of € 2 million can produce more than two companies with a capital investment of € 1 million each. In the competition , the large company prevails against the two small ones. If this tendency is continued, fewer and larger companies remain in the respective branches of the economy , which weakens competition within the branches. However, since competition is an important prerequisite for the efficiency of markets, increasing economies of scale can justify market failure .

However , they are controversial as a reason for company mergers or collaborations , as positive economies of scale require a production facility. This would only be conceivable with the following specialization of individual companies (instead of producing two products in two companies, only one product is produced per production facility).

## Differentiation from the economies of density

Of the economies of scale which are economies of density ( density advantage ) clearly demarcated. While the economies of scale both on a scale elasticity greater than one ( economies of scale ), and on a farm size variation may be due, describes the latter short-term, limited in time, intensity even combined time-intensity moderate or quantitative adjustments . In contrast, the economies of density are only dependent on the degression of fixed costs, since a constant company size is assumed.

## Delimitation from the economies of scope

While economies of scale on the efficiency advantage of the production quantity of a product related, the term covers composite effects ( economies of scope ) such advantages, which extends through the width or depth yield of production (or services). Examples from practice are car manufacturers who are adding a model series to their range of products ( Mercedes A-Class , VW Phaeton etc.), a fast-food restaurant that offers coffee specialties in a separate section of its branches ( McCafé ), manufacturers who modify existing products with new ones To develop target groups ( Dove for Men, Nivea for Men, Beck's Gold, Coke Zero ), or call centers that handle hotlines for several different products.