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Economies of scale refers to the phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm.

Similarly, the opposite phenomenon, diseconomies of scale, occurs when the average unit costs of production increase beyond a certain level of output. At the point where the average costs are at a minimum, the minimum efficient scale (MES) of output of a firm or plant is reached.

A distinction is often made between different types of economies of scale such as:

- Product specific economies of scale; and

- Plant specific economies of scale.

The maximum efficient scale of output is reached at the point just before diseconomies set in, that is unit costs of production start to increase. Between the range of minimum and maximum efficient scale of output, there may also exist constant returns to scale where the average unit costs of production remain unchanged as output increases. The minimum and maximum scales of output, in relation to the total demand or market size have an important bearing on the number and size distribution of firms in an industry and on concentration.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Plant specific economies of scale
Product specific economies of scale


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Tuesday, March 4, 2003