CTown Supermarkets is a chain of independently owned and operated supermarkets operating in the northeastern United States .
85-535: CTown was founded in 1975. CTown uses economies of scale so its small member stores can pool their resources for purchasing and advertising. CTown tends to open supermarkets in locations that suburban stores have abandoned. CTown Supermarkets tend to depend on more customers who are pedestrians and fewer who drive, as shown by their smaller parking lots. There are approximately 200 stores in Connecticut , Massachusetts , New Jersey , New York , and Pennsylvania . CTown
170-428: A + w ( Y t − 1 − Y t − 2 ) {\displaystyle I_{t}=I_{a}+w(Y_{t-1}-Y_{t-2})} This states that investment is determined by exogenous investment and lagged income multiplied by the accelerator coefficient. Kaldor's model modified this to include a negative coefficient for the capital stock: I t = I
255-414: A + w ( Y t − 1 − Y t − 2 ) − j K {\displaystyle I_{t}=I_{a}+w(Y_{t-1}-Y_{t-2})-jK} Kaldor then assumed that the investment and savings functions are non-linear. He argued that at the peaks and troughs of the cycle the marginal propensity to save shifts in opposite ways. The intuition behind this
340-498: A book entitled The Scourge of Monetarism , deeply criticizing monetarist-inspired policies. Kaldor was invited by then Prime Minister of India— Jawaharlal Nehru —to design an expenditure tax system for India in the 1950s. He also went to India's Centre for Development Studies (CDS) in 1985 to inaugurate and deliver the first Joan Robinson Memorial Lecture. Owing to these links, the Kaldor family donated his entire personal collection to
425-460: A company gains an added benefit by expanding its size. These economies are due to the presence of some resource or competence that is not fully utilized, or to the existence of specific market positions that create a differential advantage in expanding the size of the firms. That growth economies disappear once the scale size expansion process is completed. For example, a company that owns a supermarket chain benefits from an economy of growth if, opening
510-591: A differentiated demand with respect to the quality of the product, and assistance before and after the sale. Very different organizational forms can therefore co-exist in the same sector of activity, even in the presence of economies of scale, such as, for example, flexible production on a large scale, small-scale flexible production, mass production, industrial production based on rigid technologies associated with flexible organizational systems and traditional artisan production. The considerations regarding economies of scale are therefore important, but not sufficient to explain
595-423: A downward shift in the investment curve as businessmen decide their factories become overfull. In the third stage (which overlaps with the second stage) the high growth in income causes higher saving which pushes the savings curve upwards. At this point the two curves become tangential and the equilibrium becomes unstable which generates a recession. In the fourth stage the same dynamics kick in but this time moving in
680-421: A firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function. A production function has constant returns to scale if increasing all inputs by some proportion results in output increasing by that same proportion. Returns are decreasing if, say, doubling inputs results in less than double the output, and increasing if more than double
765-427: A more efficient division of labour. The economies of division of labour derive from the increase in production speed, from the possibility of using specialized personnel and adopting more efficient techniques. An increase in the division of labour inevitably leads to changes in the quality of inputs and outputs. Many administrative and organizational activities are mostly cognitive and, therefore, largely independent of
850-407: A new supermarket, it gets an increase in the price of the land it owns around the new supermarket. The sale of these lands to economic operators, who wish to open shops near the supermarket, allows the company in question to make a profit, making a profit on the revaluation of the value of building land. Overall costs of capital projects are known to be subject to economies of scale. A crude estimate
935-496: A product X is lower when a single firm instead of two separate firms produce it. See Economies of scope#Economics . Some of the economies of scale recognized in engineering have a physical basis, such as the square–cube law , by which the surface of a vessel increases by the square of the dimensions while the volume increases by the cube. This law has a direct effect on the capital cost of such things as buildings, factories, pipelines, ships and airplanes. In structural engineering,
SECTION 10
#17328686566081020-445: A recession or depression and so would dampen the cycle. Kaldor's model assumes wage and price flexibility. If wage and price flexibility are not forthcoming the economy may have a tendency to either perpetual and rising inflation or persistent stagnation. Kaldor also makes strong assumptions about how wages and prices respond in both inflations and depressions. If these assumptions do not hold Kaldor's model would lead us to conclude that
1105-547: A relationship somewhat similar to the square–cube law. In some productions, an increase in the size of the plant reduces the average variable cost, thanks to the energy savings resulting from the lower dispersion of heat. Economies of increased dimension are often misinterpreted because of the confusion between indivisibility and three-dimensionality of space. This confusion arises from the fact that three-dimensional production elements, such as pipes and ovens, once installed and operating, are always technically indivisible. However,
1190-461: A result, numerous studies have indicated that the procurement volume must be sufficiently high to provide sufficient profits to attract enough suppliers, and provide buyers with enough savings to cover their additional costs. However, Shalev and Asbjornse found, in their research based on 139 reverse auctions conducted in the public sector by public sector buyers, that the higher auction volume, or economies of scale, did not lead to better success of
1275-451: A stable fashion. The British Neo-Keynesian John Hicks tried to improve the theory by imposing rigid ceilings and floors on the model. But most people thought that this was a poor way of explaining the cycle as it relied on artificial, exogenous constraints. Kaldor, however, had actually invented a fully coherent and highly realistic account of the business cycle in 1940. He used non-linear dynamics to construct this theory. Kaldor's theory
1360-733: A unit of capacity of many types of equipment, such as electric motors, centrifugal pumps, diesel and gasoline engines, decreases as size increases. Also, the efficiency increases with size. Operating crew size for ships, airplanes, trains, etc., does not increase in direct proportion to capacity. (Operating crew consists of pilots, co-pilots, navigators, etc. and does not include passenger service personnel.) Many aircraft models were significantly lengthened or "stretched" to increase payload. Many manufacturing facilities, especially those making bulk materials like chemicals, refined petroleum products, cement and paper, have labor requirements that are not greatly influenced by changes in plant capacity. This
1445-440: A variety of organizational and business situations and at various levels, such as a production, plant or an entire enterprise. When average costs start falling as output increases, then economies of scale occur. Some economies of scale, such as capital cost of manufacturing facilities and friction loss of transportation and industrial equipment, have a physical or engineering basis . The economic concept dates back to Adam Smith and
1530-445: Is a correlating relationship between a firm's total sales and underlying efficiency. Firms with higher productivity will always outperform a firm with lower productivity which will lead to lower sales. Through trade liberalization, organizations are able to drop their trade costs due to export growth. However, trade liberalization does not account for any tariff reduction or shipping logistics improvement. However, total economies of scale
1615-627: Is a historically contingent fact, and not essential to the nature of such enterprises. In the case of agriculture, for example, Marx calls attention to the sophistical nature of the arguments used to justify the system of concentrated ownership of land: Instead of concentrated private ownership of land, Marx recommends that economies of scale should instead be realized by associations : Alfred Marshall notes that Antoine Augustin Cournot and others have considered "the internal economies [...] apparently without noticing that their premises lead inevitably to
1700-477: Is based on the exporters individual frequency and size. So large-scale companies are more likely to have a lower cost per unit as opposed to small-scale companies. Likewise, high trade frequency companies are able to reduce their overall cost attributed per unit when compared to those of low-trade frequency companies. 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
1785-411: Is because labor requirements of automated processes tend to be based on the complexity of the operation rather than production rate, and many manufacturing facilities have nearly the same basic number of processing steps and pieces of equipment, regardless of production capacity. Karl Marx noted that large scale manufacturing allowed economical use of products that would otherwise be waste. Marx cited
SECTION 20
#17328686566081870-606: Is created by second-tier banks through the distribution of credits to households and companies . In the Post-Keynesian framework, central banks only refinance second-tier banks on demand, but they are unable to properly create money. Despite insightful contributions, Kaldor could not initially win the debate, as monetarist policies where implemented by most central banks. He would, however, later be vindicated by empirical findings and policy, with money creation now being generally agreed to be mostly endogenous. In 1982, he published
1955-420: Is due to the fact that if firms have a very large amount of productive capacity accumulated already they will not be as inclined to invest in more. Kaldor was in effect integrating Roy Harrod 's ideas about unbalanced growth into his theory. In the standard accelerator model that stood behind Samuelson's and Hicks' business cycle theories investment was determined as such: I t = I
2040-424: Is expanded, including the aspects concerning the development of knowledge and the organization of transactions, it is possible to conclude that economies of scale do not always lead to monopoly. In fact, the competitive advantages deriving from the development of the firm's capabilities and from the management of transactions with suppliers and customers can counterbalance those provided by the scale, thus counteracting
2125-442: Is one where the costs of production fall when the number of firms in the industry drops, but the remaining firms increase their production to match previous levels. Conversely, an industry exhibits an external economy of scale when costs drop due to the introduction of more firms, thus allowing for more efficient use of specialized services and machinery. Economies of scale exist whenever the total cost of producing two quantities of
2210-505: Is possible within a particular country—for example, it would not be efficient for Liechtenstein to have its own carmaker if they only sold to their local market. A lone carmaker may be profitable, but even more so if they exported cars to global markets in addition to selling to the local market. Economies of scale also play a role in a " natural monopoly ". There is a distinction between two types of economies of scale: internal and external. An industry that exhibits an internal economy of scale
2295-608: Is saturating the regional market, thus having to ship products uneconomic distances. Other limits include using energy less efficiently or having a higher defect rate. Large producers are usually efficient at long runs of a product grade (a commodity) and find it costly to switch grades frequently. They will, therefore, avoid specialty grades even though they have higher margins. Often smaller (usually older) manufacturing facilities remain viable by changing from commodity-grade production to specialty products. Economies of scale must be distinguished from economies stemming from an increase in
2380-444: Is that during recessions people will cut their savings to maintain their standard of living while at high levels of income people will save a larger proportion of their income. He also argued that at the peaks and troughs of the cycle the marginal propensity to invest shifts. The intuition behind this is that at the trough of the cycle there will be a large amount of excess capacity and so businessmen will not want to invest more, while at
2465-433: Is that if the capital cost for a given sized piece of equipment is known, changing the size will change the capital cost by the 0.6 power of the capacity ratio (the point six to the power rule ). In estimating capital cost, it typically requires an insignificant amount of labor, and possibly not much more in materials, to install a larger capacity electrical wire or pipe having significantly greater capacity. The cost of
2550-867: Is the fifth-largest food retailer in the New York City metropolitan area . CTown is supplied by Krasdale Foods ; many products sold in CTown stores are labeled Krasdale Foods (Krasdale also is a supplier for the smaller Bravo supermarket chain). Marketing and advertising for CTown are handled by Alpha-I Marketing Corp. This United States retail business article is a stub . You can help Misplaced Pages by expanding it . Economies of scale 1800s: Martineau · Tocqueville · Marx · Spencer · Le Bon · Ward · Pareto · Tönnies · Veblen · Simmel · Durkheim · Addams · Mead · Weber · Du Bois · Mannheim · Elias In microeconomics , economies of scale are
2635-575: The Solow Growth Model in response to these perceived problems, summarised this view as such: Keep in mind that Harrod’s first Essay was published in 1939 and Domar’s first article in 1946. Growth theory, like much else in macroeconomics, was a product of the depression of the 1930s and of the war that finally ended it. So was I. Nevertheless it seemed to me that the story told by these models felt wrong. An expedition from Mars arriving on Earth having read this literature would have expected to find only
CTown Supermarkets - Misplaced Pages Continue
2720-538: The University of Cambridge . On 9 July 1974, Kaldor was made a life peer as Baron Kaldor , of Newnham in the City of Cambridge . In 1969–1970, Kaldor was involved in a fierce debate with the so-called U.S. monetarist economist Milton Friedman . While Friedman defended the exogenous money supply theory, according to which money is created by powerful central banks , Kaldor and Post-Keynesian economists claimed that money
2805-415: The short-run average total cost (SRATC) curve down and to the right. Economies of scale is a concept that may explain patterns in international trade or in the number of firms in a given market. The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for free trade policies, since some economies of scale may require a larger market than
2890-417: The "physical" point of view of the returns to scale. Furthermore, supply contracts entail fixed costs which lead to decreasing average costs if the scale of production increases. This is of important utility in the study of corporate finance . Economies of productive capacity balancing derives from the possibility that a larger scale of production involves a more efficient use of the production capacities of
2975-708: The 1960s. The ignorance on the part of the American economists' knowledge of Kaldor's model also explains why the Cambridge Post-Keynesian economists found the ISLM model favoured by the American Neo-Keynesians to be crude and lacking. Kaldor was married to Clarissa Goldsmith, a prominent figure in Cambridge city life and a history graduate from Somerville College, Oxford . They had four daughters: Penny Milsom,
3060-551: The CDS Library. There are 362 books in the collection and they cover a wide range of titles on economic theory, classical political economy, business cycles and history of economic thought. After the publication of John Maynard Keynes ' General Theory , many attempts were made to build a business cycle model. The models that were built by American Neo-Keynesians such as Paul Samuelson proved unstable. They could not describe why an economy should cycle through recession and growth in
3145-784: The LSE. Between 1943 and 1945, Kaldor worked for the National Institute of Economic and Social Research and in 1947 he resigned from the LSE to become Director of Research and Planning at the Economic Commission for Europe . He was elected to a Fellowship at King's College, Cambridge and offered a lectureship in the Economics Faculty of the University in 1949. He became a Reader in Economics in 1952, and Professor in 1966. From 1964, Kaldor
3230-401: The accumulated capital stock. The idea that investment depends positively on the growth of income is simply the idea of the accelerator model that holds that in periods of high income growth and hence demand growth, investment should rise in the anticipation of high income and demand growth in the future. The intuition lying behind the negative relationship to the accumulation of the capital stock
3315-511: The advantages of external economies linked to an increase in the production of an entire sector of activity. However, "those economies which are external from the point of view of the individual firm, but internal as regards the industry in its aggregate, constitute precisely the class which is most seldom to be met with." "In any case - Sraffa notes – in so far as external economies of the kind in question exist, they are not linked to be called forth by small increases in production," as required by
3400-512: The assumption of free competition to address the study of firms that have their own particular market. This stimulated a whole series of studies on the cases of imperfect competition in Cambridge. However, in the succeeding years Sraffa followed a different path of research that brought him to write and publish his main work Production of commodities by means of commodities ( Sraffa 1966 ). In this book, Sraffa determines relative prices assuming no changes in output, so that no question arises as to
3485-431: The auction. They found that auction volume did not correlate with competition, nor with the number of bidders, suggesting that auction volume does not promote additional competition. They noted, however, that their data included a wide range of products, and the degree of competition in each market varied significantly, and offer that further research on this issue should be conducted to determine whether these findings remain
CTown Supermarkets - Misplaced Pages Continue
3570-431: The average cost for all firms as opposed to internal economies of scale which only allows benefits to the individual firm. Advantages that arise from external economies of scale include; Firms are able to lower their average costs by buying their inputs required for the production process in bulk or from special wholesalers. Firms might be able to lower their average costs by improving their management structure within
3655-434: The base of dynamic economies of scale, associated with the process of growth of the scale dimension and not to the dimension of scale per se. Learning by doing implies improvements in the ability to perform and promotes the introduction of incremental innovations with a progressive lowering of average costs. Learning economies are directly proportional to the cumulative production ( experience curve ). Growth economies emerge if
3740-489: The business cycle had an inherent mechanism built into it that redistributed income across the cycle and that these mitigated "explosive" results. As we have seen, in a cyclical upswing where planned investment begins to outstrip planned savings prices will tend to rise. Kaldor assumed that those who set prices have more power than those who set wages and so prices will tend to rise faster than wages. This means that profits must also rise faster than wages. Kaldor argued that due to
3825-508: The capitalist system is therefore characterized by two tendencies, connected to economies of scale: towards a growing concentration and towards economic crises due to overproduction. In his 1844 Economic and Philosophic Manuscripts , Karl Marx observes that economies of scale have historically been associated with an increasing concentration of private wealth and have been used to justify such concentration. Marx points out that concentrated private ownership of large-scale economic enterprises
3910-452: The chemical industry as an example, which today along with petrochemicals, remains highly dependent on turning various residual reactant streams into salable products. In the pulp and paper industry, it is economical to burn bark and fine wood particles to produce process steam and to recover the spent pulping chemicals for conversion back to a usable form. Large and more productive firms typically generate enough net revenues abroad to cover
3995-425: The conclusion that, whatever firm first gets a good start will obtain a monopoly of the whole business of its trade … ". Marshall believes that there are factors that limit this trend toward monopoly, and in particular: Piero Sraffa observes that Marshall, in order to justify the operation of the law of increasing returns without it coming into conflict with the hypothesis of free competition, tended to highlight
4080-763: The core variables and their linkages are delineated. Káldor Miklós was born in Budapest , son of Gyula Káldor, lawyer and legal adviser to the German legation in Budapest, and Jamba, an accomplished linguist and "a well-educated, cultured woman". He was educated in Budapest, as well as in Berlin, and at the London School of Economics , where he graduated with a first-class BSc (Econ.) degree in 1930. He subsequently became an assistant lecturer and, by 1938, lecturer and reader in economics at
4165-447: The cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time . A decrease in cost per unit of output enables an increase in scale that is, increased production with lowered cost. At the basis of economies of scale, there may be technical, statistical, organizational or related factors to the degree of market control. Economies of scale arise in
4250-528: The cycle might give way to either perpetual and rising inflation or stagnation. Kaldor's non-linear business cycle theory overcomes the difficulty that many economists had with Roy Harrod 's growth theory. Many of the American Neo-Keynesian economists thought that Harrod's work implied that capitalism would tend toward extremes of zero and infinite growth and that there were no dynamics that might keep it in check. Robert Solow , who eventually created
4335-400: The different savings propensities of capitalists and workers this will lead to higher savings. This will then dampen the cycle somewhat. In a recession or depression Kaldor argued that prices should fall faster than wages for the same reasons that Keynes laid out in his General Theory. This meant that income would be redistributed to workers as real wages rose. This would lead savings to fall in
SECTION 50
#17328686566084420-462: The economies of scale due to the increase in size do not depend on indivisibility but exclusively on the three-dimensionality of space. Indeed, indivisibility only entails the existence of economies of scale produced by the balancing of productive capacities, considered above; or of increasing returns in the utilisation of a single plant, due to its more efficient use as the quantity produced increases. However, this latter phenomenon has nothing to do with
4505-434: The economies of scale which, by definition, are linked to the use of a larger plant. At the base of economies of scale there are also returns to scale linked to statistical factors. In fact, the greater of the number of resources involved, the smaller, in proportion, is the quantity of reserves necessary to cope with unforeseen contingencies (for instance, machine spare parts, inventories, circulating capital, etc.). One of
4590-422: The factors underlying the ever-increasing concentration of capital. Marx observes that in the capitalist system the technical conditions of the work process are continuously revolutionized in order to increase the surplus by improving the productive force of work. According to Marx, with the cooperation of many workers brings about an economy in the use of the means of production and an increase in productivity due to
4675-410: The firm increase, the notions of increasing returns to scale and economies of scale can be considered equivalent. However, if input prices vary in relation to their quantities purchased by the company, it is necessary to distinguish between returns to scale and economies of scale. The concept of economies of scale is more general than that of returns to scale since it includes the possibility of changes in
4760-518: The firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale if and only if it has increasing returns to scale, has diseconomies of scale if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale. In this case, with perfect competition in
4845-454: 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. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range. In essence, returns to scale refer to
4930-455: The firm. This can range from hiring better skilled or more experienced managers from the industry. Technological advancements change production processes and subsequently reduce the overall cost per unit. Tim Hindle argues that the rollout of the internet "has completely reshaped the assumptions underlying economies of scale". Nicholas Kaldor Nicholas Kaldor, Baron Kaldor (12 May 1908 – 30 September 1986), born Káldor Miklós ,
5015-435: The fixed costs associated with exporting. However, in the event of trade liberalization, resources will have to be reallocated toward the more productive firm, which raises the average productivity within the industry. Firms differ in their labor productivity and the quality of their products, so more efficient firms are more likely to generate more net income abroad and thus become exporters of their goods or services. There
5100-604: The founder of political economy as an autonomous discipline. John Stuart Mill , in Chapter IX of the First Book of his Principles, referring to the work of Charles Babbage (On the economics of machines and manufactories), widely analyses the relationships between increasing returns and scale of production all inside the production unit. In Das Kapital (1867), Karl Marx , referring to Charles Babbage , extensively analyzed economies of scale and concludes that they are one of
5185-438: The idea of obtaining larger production returns through the use of division of labor. Diseconomies of scale are the opposite. Economies of scale often have limits, such as passing the optimum design point where costs per additional unit begin to increase. Common limits include exceeding the nearby raw material supply, such as wood in the lumber, pulp and paper industry . A common limit for a low cost per unit weight commodities
SECTION 60
#17328686566085270-479: The increase in the division of labour. Furthermore, the increase in the size of the machinery allows significant savings in construction, installation and operation costs. The tendency to exploit economies of scale entails a continuous increase in the volume of production which, in turn, requires a constant expansion of the size of the market. However, if the market does not expand at the same rate as production increases, overproduction crises can occur. According to Marx
5355-419: The individual phases of the production process. If the inputs are indivisible and complementary, a small scale may be subject to idle times or to the underutilization of the productive capacity of some sub-processes. A higher production scale can make the different production capacities compatible. The reduction in machinery idle times is crucial in the case of a high cost of machinery. A larger scale allows for
5440-424: The marginalist theory of price. Sraffa points out that, in the equilibrium theory of the individual industries, the presence of external economies cannot play an important role because this theory is based on marginal changes in the quantities produced. Sraffa concludes that, if the hypothesis of perfect competition is maintained, economies of scale should be excluded. He then suggests the possibility of abandoning
5525-501: The opposite direction. By the sixth stage the equilibrium is again unstable and a boom is produced. Kaldor also noted the importance of income distribution in his theory of the business cycle. He assumed that savings out of profits were higher than savings out of wages; that is, he argued that poorer people (workers) tend to save less than richer people (capitalists). Or: S w < S p {\displaystyle S_{w}<S_{p}} Kaldor believed that
5610-411: The output market the long-run equilibrium will involve all firms operating at the minimum point of their long-run average cost curves (i.e., at the borderline between economies and diseconomies of scale). If, however, the firm is not a perfect competitor in the input markets, then the above conclusions are modified. For example, if there are increasing returns to scale in some range of output levels, but
5695-475: The output. If a mathematical function is used to represent the production function, and if that production function is homogeneous , returns to scale are represented by the degree of homogeneity of the function. Homogeneous production functions with constant returns to scale are first degree homogeneous, increasing returns to scale are represented by degrees of homogeneity greater than one, and decreasing returns to scale by degrees of homogeneity less than one. If
5780-421: The peak of the cycle rising costs will discourage investment. This creates non-linear dynamics in the economy that then drive the business cycle. When Kaldor combines these components we get a clear six-stage model of the business cycle. In the first stage the economy is in equilibrium position. Investment is taking place and the capital stock is growing. In the second stage the growth in the capital stock leads to
5865-405: The presence of significant economies of scale. This contradiction, between the empirical evidence and the logical incompatibility between economies of scale and competition, has been called the 'Cournot dilemma'. As Mario Morroni observes, Cournot's dilemma appears to be unsolvable if we only consider the effects of economies of scale on the dimension of scale. If, on the other hand, the analysis
5950-450: The price of inputs when the quantity purchased of inputs varies with changes in the scale of production. The literature assumed that due to the competitive nature of reverse auctions , and in order to compensate for lower prices and lower margins, suppliers seek higher volumes to maintain or increase the total revenue. Buyers, in turn, benefit from the lower transaction costs and economies of scale that result from larger volumes. In part as
6035-569: The production of a given plant. When a plant is used below its optimal production capacity , increases in its degree of utilization bring about decreases in the total average cost of production. Nicholas Georgescu-Roegen (1966) and Nicholas Kaldor (1972) both argue that these economies should not be treated as economies of scale. The simple meaning of economies of scale is doing things more efficiently with increasing size. Common sources of economies of scale are purchasing (bulk buying of materials through long-term contracts), managerial (increasing
6120-400: The reasons firms appear is to reduce transaction costs . A larger scale generally determines greater bargaining power over input prices and therefore benefits from pecuniary economies in terms of purchasing raw materials and intermediate goods compared to companies that make orders for smaller amounts. In this case, we speak of pecuniary economies, to highlight the fact that nothing changes from
6205-441: The same when purchasing the same product for both small and high volumes. Keeping competitive factors constant, increasing auction volume may further increase competition. The first systematic analysis of the advantages of the division of labour capable of generating economies of scale, both in a static and dynamic sense, was that contained in the famous First Book of Wealth of Nations (1776) by Adam Smith , generally considered
6290-426: The scale of production. When the size of the company and the division of labour increase, there are a number of advantages due to the possibility of making organizational management more effective and perfecting accounting and control techniques. Furthermore, the procedures and routines that turned out to be the best can be reproduced by managers at different times and places. Learning and growth economies are at
6375-427: The size of the company and the market structure. It is also necessary to take into account the factors linked to the development of capabilities and the management of transaction costs. External economies of scale tend to be more prevalent than internal economies of scale. Through the external economies of scale, the entry of new firms benefits all existing competitors as it creates greater competition and also reduces
6460-446: The specialization of managers), financial (obtaining lower- interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets ), and technological (taking advantage of returns to scale in the production function). Each of these factors reduces the long run average costs (LRAC) of production by shifting
6545-449: The strength of beams increases with the cube of the thickness. Drag loss of vehicles like aircraft or ships generally increases less than proportional with increasing cargo volume, although the physical details can be quite complicated. Therefore, making them larger usually results in less fuel consumption per ton of cargo at a given speed. Heat loss from industrial processes vary per unit of volume for pipes, tanks and other vessels in
6630-399: The tendency towards a monopoly inherent in economies of scale. In other words, the heterogeneity of the organizational forms and of the size of the companies operating in a sector of activity can be determined by factors regarding the quality of the products, the production flexibility, the contractual methods, the learning opportunities, the heterogeneity of preferences of customers who express
6715-531: The time Solow was working on his growth theory, the Cambridge UK economists had already satisfactorily laid out a self-limiting theory of the business cycle that they thought was a reasonable description of the real world. This is one of the reasons that the Cambridge economists were so hostile in their reaction to Solow's growth model and went on to attack it in the Cambridge Capital Controversy of
6800-417: The variation in the relationship between inputs and output . This relationship is therefore expressed in "physical" terms. But when talking about economies of scale, the relation taken into consideration is that between the average production cost and the dimension of scale. Economies of scale therefore are affected by variations in input prices. If input prices remain the same as their quantities purchased by
6885-556: The variation or constancy of returns. In 1947, DuPont engineer Roger Williams, Jr. (1930-2005) published a rule of thumb that costs of chemical process are roughly proportional to the tonnage in power ~0.6 . In the following decades it became widely adopted other engineering industries and terrestrial mining, sometimes (e. g., in electrical power generation) with modified exponential scaling factors. It has been noted that in many industrial sectors there are numerous companies with different sizes and organizational structures, despite
6970-458: The wreckage of a capitalism that had shaken itself to pieces long ago. Economic history was indeed a record of fluctuations as well as of growth, but most business cycles seemed to be self-limiting. Sustained, though disturbed, growth was not a rarity. In fact, Kaldor's 1940 paper had already shown this to be completely untrue. Solow was working with an erroneous and underdeveloped theory of the business cycle that he had taken over from Samuelson. By
7055-413: Was a Hungarian-born British economist. He developed the "compensation" criteria called Kaldor–Hicks efficiency for welfare comparisons (1939), derived the cobweb model , and argued for certain regularities observable in economic growth, which are called Kaldor's growth laws . Kaldor worked alongside Gunnar Myrdal to develop the key concept Circular Cumulative Causation , a multicausal approach where
7140-618: Was an advisor to the Labour government of the UK and also advised several other countries, producing some of the earliest memoranda regarding the creation of value added tax . Inter alia, Kaldor was considered, with his fellow- Hungarian Thomas Balogh , one of the intellectual authors of the 1964–1970 Harold Wilson 's government's short-lived Selective Employment Tax (SET) designed to tax employment in service sectors while subsidising employment in manufacturing. In 1966, he became professor of economics at
7225-417: Was similar to Samuelson's and Hicks' as it used a multiplier-accelerator model to understand the cycle. It differed from these theories, however, as Kaldor introduced the capital stock as an important determinant of the trade cycle. This was in keeping with Keynes' sketch of the business cycle in his General Theory. Following Keynes, Kaldor argued that investment depended positively on income and negatively on
#607392