Economies of Scale Theory

The chapter provides a structured description of the principles of economies of scale and scope and the benefits of specialisation. The chapter presents how the theory has its origins and practical application in Adam Smith’s Wealth of Nations and the benefits of the practical application of the theory in mass production using the conveyor belt by Henry Ford.

Ex. 1‑28 Differences between economies of scale and economies of scope

Keywords: economy of scale, economy of scope

Ex. 1‑29 Impact of scale on direct and indirect costs

Keywords: direct costs, indirect costs

It is important not to confuse economy of scale with the very broad but often confused concept of economy of scope. While in English, these two concepts are described by two different words – SCALE and SCOPE – other languages worldwide are not all rich in economic terms, often using the same word for quantity. However, economy of scope are similar to, but distinct from, economy of scale. Economies of scale involve the production of the same product in large quantities, whereas economies of volume involve the production of different products.

Economy of scale eventually lead to one or a few firms capturing the entire market for a given product.

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