With a simple adjustment it is possible to show that economies of scale in production is equivalent to increasing returns to scale . In the adjoining diagram we plot labor productivity in steel production when production exhibits increasing returns to scale. In other words, output per unit of labor input increases as the scale of production rises, hence increasing returns to scale. Another way to characterize economies of scale is with a decreasing average cost curve. When average costs decline as output increases it means that it becomes cheaper to produce the average unit as the scale of production rises, hence economies of scale.
Economies of scale are most likely to be found in industries with large fixed costs in production.
Fixed costs are those costs that must be incurred even if production were to drop to zero. For example fixed costs arise when large amounts of capital equipment must be put into place even if only one unit is to be produced and if the costs of this equipment must still be paid even with zero output. In this case the larger the output, the more the costs of this equipment can be spread out among more units of the good. Large fixed costs and hence economies of scale are prevalent in highly capital intensive industries such as chemicals, petroleum, steel, automobiles etc.