Economies of scale | Wikipedia audio article
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Date: 27/11/2018

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Economies of scale

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SUMMARY
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In microeconomics, economies of scale are the cost advantages that  enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale. (In economics, "scale" is synonymous with quantity.)
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. When average costs start falling as output increases, then economies of scale are occurring. If a firm's marginal cost of producing a good or service is beneath its average cost of producing that good or service, then the firm is experiencing economies of scale.
Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial equipment, have a physical or engineering basis.
Another source of scale economies is the possibility of purchasing inputs at a lower per-unit cost when they are purchased in large quantities.
The economic concept dates back to Adam Smith and the idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale are the opposite.
Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase.  Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper industry. A common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship product uneconomical distances. Other limits include using energy less efficiently or having a higher defect rate.
Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently.  They will therefore avoid specialty grades even though they have higher margins.  Often smaller (usually older) manufacturing facilities remain viable by changing from commodity grade production to specialty products.