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Economies of scale is related to and can easily be confused with the theoretical economic notion of returns to scale. Where economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function.
External economies of scale result from an increase in the productivity of an entire industry, region, or economy due to factors outside of an individual company. There are three sources of external economies of scale: input sharing, labor market pooling, and knowledge spillovers (Marshall, 1920). [1] Localization economies occur when an ...
For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input's per-unit cost, then the firm could have diseconomies of scale in that range of output levels.
Economies of scale refers to the cost advantage arise from increasing amount of production. Mathematically, it is a situation in which the firm can double its output for less than doubling the cost, which brings cost advantages. Usually, economies of scale can be represented in connection with a cost-production elasticity, Ec. [3]
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Benefits of horizontal integration to both the firm and society may include economies of scale and economies of scope. For the firm, horizontal integration may provide a strengthened presence in the reference market. [5] This means that with the merger, two firms would then be able to produce more revenue than one firm alone.
Example: there are three goods (a, b1, b2) and two voters, where Alice values a, b1 at 1 and b2 at 0, and George values a, b2 at 1 and b1 at 0. The budget of each agent is 3, and the cost of each good is 2. Producing only {a} is a Lindahl equilibrium, with prices for Alice: 2-0.009, 2-0.006, 0.001 and prices for George: 2-0.009, 0.001, 2-0.006.
Scope economies, or economies of scope, describe the aspect of production wherein cost savings result from the scope of an enterprise, as opposed to its scale (see economies of scale). Meaning, there are economies of scope where it is less expensive for firms to combine two or more product lines into one, than it is to produce each product ...