Economy of scale

As economies of scale cost benefits are referred to in the production theory of economics that result from the size of a company or production. So long as there economies of scale, it basically makes sense for a company to produce more units of a commodity in order to achieve lower unit costs. In this case, mostly the fixed costs must be spread over a larger quantity. Often, the English term ( economies of scale), instead of the German used.

Under certain circumstances, an increase in the quantity produced also to diseconomies (English diseconomies of scale) lead. So decreases with increasing firm size typically (not directly productive acting ) coordination effort in a company.

Definition

Economies of scale (English economies of scale ) are also referred to as economies of scale, economies of scale or increasing returns to scale. Economies of scale are, if a proportional increase in all inputs (eg 1% ) causes a disproportionate increase of all output components ( by more than 1%). Thus, taking the output of a production unit, the average cost of the company for the production of this output can sink up to a certain point. In other words: In order to double the output of a company, the costs have increased less than twofold. This curve is called a size advantage.

Economies of scale are defined as cost benefits resulting from the company's size and / or the capacity size. The share of fixed costs per unit of production are dependent on the size of the company and the production volume; the larger the company is, the lower the share of fixed costs.

In a normal competitive economies of scale lead to such a strong expansion of company size, the perfect competition in these sectors is no longer secured and in an industry, few companies are active - or even just a single one. In Einproduktfall falling average costs lead to immediate incentives for mergers with the aim of increasing efficiency due to high fixed costs. The presence of economies of scale maximizes welfare by a certain number of companies. Actions the company under this economic assumption, then use the ( size ) advantage in an industry. Thus, the company have a large farm size compared to the size of the industry ( the market). This has the consequence that they serve a large proportion of the demand and so few other companies can enter the market, to serve the remaining portion of the demand. Joe Bain defined this phenomenon in 1949 as the cause of the occurrence of a barrier to entry into the market.

The method of scale is directly applicable for the analysis of intra-and interindustriellem trade. Operating a company the domestic market with a particular product, it can export this product in another country. In return, it could import another good thing that it does not produce itself, but a demand for this product is available in the domestic market. Thus, the company could generate more profits.

Global viewing

The size advantage is not seen primarily in relation to other companies ( competitors ), but in comparison with its own input and output quantities. That is to say, what input allows the company to operate at extreme levels. Thus, the profit maximization ( cost principles with regard to the maximum principle) as corporate principle, the cost is (cost as low as possible ) implemented.

" To analyze the relationship between farm size and the cost of the company, we must recognize that the expansion path ( passing through the points of tangency of the isocost and isoquant of an enterprise curve) of the company not forming when changing the input proportions Just more and the concept of returns to scale (inputs be used for growth of output in constant ratios, in contrast to the economies of scale, in which the input proportions are variable ) is no longer true. Instead, we can say that the company enjoys economies of scale if it can double its output to less than twice the cost. The concept of scale includes increasing returns to scale as a special case, but is more general, as it reflects changing input proportions, when the company changed its production levels. "

Occurrence

In the media field are economies of scale, if a reduction in the output of unit costs an increase in the output quantity follows. The major economies of scale in the media incurred on account of the considerable first -copy costs. These costs consist of the cost of the entire creation of the editorial and the display contents as well as in the cost of production. In this industry, the costs are incurred regardless of the number of future users.

In addition to corporate strategies ( product differentiation, price discrimination, and others) play of scale in production an important role in order to realize a functioning competition.

In sales and marketing are also important economies of scale: large-scale advertising campaigns and market presence are the key to success.

In the operational distribution, the specific sales effort is an important role, as this decreases by higher volumes and therefore covered the costs.

Scale also occur in the procurement of resources for example be achieved Volume Discounts when purchasing larger quantities and thus reduces the cost per unit of purchased for the company.

Even in the field of research and development of scale can be used by a generated information advantage and the associated development costs are set at the highest possible numbers.

But not only from internal, but also from non-corporate contexts resulting economies of scale. Because a dominant market position of the company brings benefits to customers and strategic partners, thus leading to self-reinforcing effects.

Calculation

In order to achieve economies of scale, they are often measured on a cost -output elasticity EC. EC is the percentage increase in output resulting from a one percent change in the cost of production:

In order to examine in what relation EC stands to the conventional cost measure, the equation shown above is rewritten as follows:

EC = 1 if the marginal costs are equal to the average cost. In this case, there are neither economies of scale nor diseconomies of scale, as the costs increase proportionally with the output.

Is EC < 1, there are economies of scale, because the costs increase proportionately less than output and marginal cost is lower than the average cost.

Is EC> 1, there are diseconomies of scale, since the marginal cost is higher than the average cost.

Measurement

Whether or not there are economies of scale, illustrates the index of scale SCI. This metric is defined as follows:

Is EC = 1, SCI = 0 and there are neither economies of scale nor diseconomies of scale.
Is EC> 1, SCI is negative and there are diseconomies of scale.
Is EC < 1, SCI is positive and there are economies of scale.

Examples

The following examples are intended to illustrate that relevant scale always lose significance when fixed costs are reduced and the flexibility is increased. In order to gain a dominant or at least competitive Size, Company, therefore, often go beyond a purely internally based, organic growth,. Try by joining forces with other companies to come to an order of magnitude can be achieved at the cost advantages over the competition. Examples include, inter alia:

The aviation industry: Airbus and Boeing achieve economies of scale in research and development, purchasing, production, sales and service since they share the relevant market for large aircraft.
The steel and computer industry: The computer maker Dell has consistently established a direct sales model via telephone and internet and simultaneously optimizes the logistics, which according to the customer's requirements of individual computer achieved within a very short time the client. Because Dell 's monitors refers directly from the manufacturer, the company reduced its capital, inventory and production costs.
The automotive industry: since not many smaller and medium-sized car manufacturers over the volume to carry the huge development costs of new models, were taken this over the years of its major competitors.

Another example is the automobile manufacturer Toyota. In the 1980s, the Group reduced fixed costs, including through an innovative reduction in inventory during the production process so far down the shortening set-up times of the plants and the mass production that prevailing in this industry economies of scale play an increasingly smaller role.

Forestry

A forestry company proposes 600 trees on his land in the year. The cost per tree falls amount to 200 monetary units (GE). The work is carried out by 20 employees with 20 axes and 10 hand saws. If the company has now doubled its output to 1200, it takes 40 employees, 40 axes and 20 hand saws. The input increases proportionally to the output, thus the returns to scale are constant. However, there is for a company with such a volume of output possible some input factors by machines such as power saws to replace. The machine replaced by its faster and easier for employees handling some workers. The cost per tree impact of GE 200 back to 150 GE. The ensuing cost reduction has a lower input at a constant output result; thus a size advantage has emerged. The diagram clearly the difference and thus the size advantage at the various levels - output costs, costs per unit - to recognize.

The size advantage is most evident in the right column " cost / unit ". Here the cost per unit of production in economies of scale are much less than the cost per unit of production without economies of scale (normal).

Demarcation diseconomies

Diseconomies of scale exist when a doubling of output more than twice the cost is necessary. They arise when the cost per unit of expanding output to rise, for example, when machines are operated over their operating optimum level (internal diseconomies of scale ) or a spatial concentration to excessive load on the infrastructure leads ( external diseconomies ). Diseconomies of scale are usually the fact that the transaction costs increase disproportionately with the growth of a company. Transaction costs include all costs for the coordination of economic activities and arise both within a company as well as in business activities between market partners.

Diseconomies of scale can be distinguished with regard to cultural, technical and administrative nature.

Cultural diseconomies it applies to absorb, because the larger a company is, the more difficult it is to formulate a unified corporate structure, with which employees can identify is. For complex enterprises is also clear that it is not without problems to ensure smooth communication. These dedicated employees are required to counteract these processes.

Technical diseconomies of scale can be relatively easily controlled counter. At an excessively loaded machine in the short term, a higher maintenance costs and energy consumption, which is easy to measure results. This can be avoided, for example by buying new systems with higher capacities.

The risk of administrative diseconomies is can that large company's internal bureaucracies to grow faster than the company as a whole and so is the customer handling suffer.

Diseconomies of scale can be avoided, however, by timely counter- measures are taken. The main difficulty is to recognize these drawbacks and to counter the Clear responsibilities or even comprehensible reporting systems.

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