Indivisibilities may give rise to FCs and hence scale & scope
economies at several different levels: product level, plant level & multi
We have EOS due to 1) Spreading of product specified FCs (using
full capacity better than using % of it ie it yields the greatest cost
savings when used to capacity) 2) due to tradeoffs among alternative
technology: some machinery may yield to lower average total cost at
high production levels but it would be more costly at lower production
Reductions in AC due to increases in capacity utilization are
short run economies of scale in that they occur within a plant
of a given size.
Reductions due to adoption of a technology that has high
FCs but lower VCs are long run economies of scale.
Indivisibilities are more likely when production is capital intensive.
Productive capital is indivisible and therefore a source of
scale economies. As long as there is spare capacity output can be
expanded at little additional expense therefore AC falls. And cutbacks
in output may not reduce TCs by much and so AC may rise.
When most production expenses go to raw materials or labor we say
the production is materials or labor intensive.
Materials and labor are divisible and they usually change in rough
proportion to changes in output
Substantial product specific economies of scale are more likely
when production is capital intensive &
MINIMAL product specific economies of scale are likely when
production is materials or labor intensive.
2) Increased productivity of variable inputs (specialization)
division of labor refers to the specialization of productive
activities. This usually requires upfront investments
Adam Smith: the division of labor is limited by the extent of the
the extent of the market refers to the magnitude of demand for
Smith’s theorem suggests that individuals or firms will not make
specialized investments unless the market is big enough to support
them. Another implication is that larger markets will support a more
specialized array of activities than smaller markets can.
Also he says, specialists emerge in larger markets and the growing
firm can use them for many activities. When the market gets even