Scale Economies Concept
Scale economies represent earnings, in terms of production costs, that the organizations obtain with its growth dimension and the quantity produced. These earnings occur due to the existence of production fixed costs. Increasing the production level, these fixed costs are diluted by a bigger number of produced units causing so to lower production average cost.
The existence of scale economies is the reason that justifies the big size of companies that belong to the activity sectors with high fixed costs. For example, an oil refinery requires big size and complex equipments making the fixed costs very high forcing the companies to produce high quantities as a way to dilute these fixed costs by a high number of units, lowering by this the production average cost.
Obviously that the earnings with scale economies have limits: on one hand because these are smaller as the production increases becoming insignificant from a certain time; on the other hand, because from a certain time they are overtaken by the complexity costs associated to the increase of size.