Economies of Scale

A production process has economies of scale when the cost to produce each unit falls as the quantity of output increases. Some of the reasons why costs may fall when production quantity increases include volume discounts for supplies, longer utilization of equipment without downtime, increased time for learning to improve process expertise and quality, and enhanced productivity from resources (such as labor or capital equipment) that do not need to increase at the same rate as the quantity of production output. Each of these reasons explains, for example, why it costs less per car to produce many cars in an automobile factory than it does to produce just a few cars.

Ethical issues associated with economies of scale include honest measurement and equitable assignment of cost burdens, commutative and distributive justice, social responsibility, and management-labor relationships. The validity of the relationship between economies and scale assumes that all production costs are accurately quantified and all costs created by the production process are assigned to the process. Economies of scale may be apparent but not real—for example, if pollution costs are not completely measured or if they are borne by society rather than by process owners.

Commutative justice, or buyer-seller exchange relationships based on fairness, calls for the availability of information and knowledge in the marketplace. In a market for goods produced in processes characterized [Page 659]by economies of scale, sellers may consider if commutative justice requires informing current buyers that future unit costs will be lower as production scale increases. For example, sellers can factor into current prices both the current costs and the lower future costs.

While commutative justice suggests that the market should receive true and complete cost information, distributive justice calls for the value created by lower production costs to be equitably shared among a broader set of stakeholders. For example, the value of cost savings derived from economies of scale may be distributed as profit to equity owners or as wage increases to labor, two important stakeholder groups.

Processes characterized by economies of scale may increase their resource usage as they scale up but without increasing the overall contribution to social development. For example, if toy production scales up and increases its usage of plastic, then the cost of plastic may increase for other uses, such as the production of medical devices.

Managers must increase their application of coordination, monitoring, and control functions for business operations to achieve the potential cost efficiency offered by economies of scale. At the same time, ethical issues associated with management-labor relationships go with the increased scale of management functions.

When economies of scale are present, organizations that produce more output may come to dominate markets and communities. When this happens, it causes an increase in sensitivity to social responsibility and citizenship behaviors of large organizations, particularly concerning pollution, contribution to social infrastructure (e.g., community water, roads, and schools), boom and bust employment during business cycles, and business influence on government.