ECONOMIES OF SCALE

 Economies of scale result in cost saving. Economies of scale determine the returns to scale. Increasing returns to scale operate till economies of scale are greater than the diseconomies of scale, and returns to scale decrease when diseconomies are greater than the economies of scale. When economies and diseconomies are in balance, returns to scale are constant. The various types of economies of scale are
The economies of scale may be divided into: 
(a) Internal or Real Economies, and 
(b) External or Pecuniary Economies

INTERNAL ECONOMIES: Internal economies, also called ‘real economies’ arise from the expansion of the plant-size of the firm and are internal to the firm. Internal economies are exclusively available to the expanding firm. Internal economies may the economies in production, economies in marketing, managerial economies; and economies in transport and storage

EXTERNAL ECONOMIES: 
These are economies accruing to the firm due to discounts that it can obtain due to its large- scale operations. The larger firm may achieve: 
(a) Lower prices of its raw materials, bought at special discounts from its suppliers. 
(b) Lower cost of external finance. Banks usually offer loans to large corporations at a lower rate of interest and other favorable terms. 
(c) Lower advertising prices may be granted to larger firms if they advertise at large scales. 
(d) Transport rates are often lower if the amounts of commodities transported are large. 
(e) Finally, larger firms may be able to pay lower earnings to their workers if they attain a size, which gives them monopsonistic Power (for example, extraction industries in some areas), or due to the prestige associated with the employment by a large, well- known firm.

Besides, expansion of an industry invites and encourages the growth of ancillary industries that supply inputs. In the initial stages, such industries also enjoy the increasing returns to scale. In a competitive market, therefore, input prices go down. This benefit accrues to the expanding firms in addition to discounts and concessions. Competition between such firms and law of increasing returns at least in the initial stages reduces the cost of inputs. Reduction in input costs is an important aspect of external economies.

Where Are Economies of Scale?: 
In addition to specialization and the division of labor, there are various inputs that may result inthe production of a good and/or service.
Lower input costs: when a company buys inputs in bulk, say for example potatoes used to make French fries at a fast food chain; it can take advantage of volume discounts.
Costly inputs: Some inputs, such as advertising expenses, research and development, managerial expertise, and skilled labor are costly, but the possibility of enhanced efficiency with such inputs, can lead to a decrease in the average cost of production and selling, if a company is able to distribute the cost of such inputs over an increase in its production units. Thus, if the fast food chain decides to spend more money on technology to eventually increase efficiency by lowering the average cost of hamburger assembly, it would also have to enhance the number of hamburgers it produces a year in order to cover the increased technology expenditure.

Specialized inputs: As the scale of production of a company goes up, a company can increase the use of specialized labor and machinery resulting in higher efficiency. The reason is that workers would be better qualified for a specific job.

Techniques and Organizational inputs: As the scale of production increases, a company is able to apply better organizational skills to its resources, such as an efficient chain of command, while improving its techniques for production and marketing. Thus, behind the front desk employees at the fast food chain may be organized according to those taking in-house orders and those dedicated to drive-through customers.

Learning inputs: The learning processes related to production, selling and distribution can result in improved efficiency--practice makes perfect.