Define economies of scale. How does this relate to returns to scale? Cite and briefly discuss the main determinants of economies of scale.

When there are reduced costs per unit of production, the company reaps economies of scale because it is increasing its output without increasing its costs.  Economies of scale occur with the production of larger units of goods and services without proportionate increases in costs.

Returns to scale focus on the quantitative change in output as a result of a proportionate increase in all input factors.  Unlike economies of scale, returns to scale require a change in all inputs to result into some changes in output.  But economies of scale result when some inputs are held constant while the output increases with decreasing costs per unit.

The main determinants of economies of scale include the business size, production size, and the distribution of costs between fixed and variable.  Other factors which determine economies of scale are  technical improvements, efficient management, financial ability, market power, and access to larger networks of suppliers, markets, and distribution channels.

Explanation:

The main difference between economies of scale and returns to scale is that economies of scale compare output with production costs while returns to scale compare input with output.  This means that economies of scale are externally oriented while returns to scale are internally focused.  Returns to scale can be either constant returns to scale (CRS), increasing returns to scale (IRS), or decreasing returns to scale (DRS).

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