Occurs when a firm grows large; average costs of production fall as output increases.
Internal economies of scale:
Risk-bearing
Financial
Managerial
Technological
Marketing
Purchasing
Network economies of scale
These are gained from the expansion of ecommerce. Large online shops, such as eBay, can add extra goods and customers at a very low cost, but the revenue gained from this will be significantly larger.
External economies of scale
Occur within an industry; e.g. local roads might be improved, so transport costs for the local industries will fall.
Diseconomies of scale
These occur when output passes a certain point and average costs start to increase per extra unit of output produced.
Diseconomies of scale:
Control
Coordination
Communication
Minimum Efficiency Scale (MES)
Optimum level of output, where AC are at thier lowest; economies of scale of production have been fully utilised.
Increasing returns to scale = economies of scale
Constant returns to scale = MES
Decreasing returns to scale = diseconomies of scale
L-shape LRAC curve
Even if there are diseconomies of scale within the firm, such as if managerial costs increase, they are offset by the economies of scale gained by technical or production factors. This means that in the long run, costs continue to fall, even if the pace of falling output costs slows (shown by the flat part of the curve).
