Difference between Economies of Scale and Returns to Scale
Economies of scale and returns to scale are two different concepts but many sometimes consider both these terms equal on many levels. The concept of effects changes in overall production levels and costs are related to economies of scale and scale of returns. Economies of scale basically explain the main reduction in cost which a firm experiences during a whole year. On the other hand, the returns to scale talks about changes which are made in firm’s overall output. The returns of scale also changes at the rate at which output increases.
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Economies of scale
The reduction in cost of a particular company is related to topics of economies of scale. A company experiences economies of scale when its per unit cost reduces with expansion in its operations. When economists talk about economies of scale, they basically talk about two types of costs, fixed and variable costs. Fixed costs always remain same but variables costs vary and changes with number of units produced. For example, property and equipment costs are variable costs. Along with property and equipment or labour and raw material costs are also variable costs. When total costs are added, all the fixed and variable costs are also included. To understand when a company achieves economies of scale, the total cost per unit reduces when more and more units and produced. This is a fairly basic economic principle that can be rather confusing at first but once you understand the basic premise behind it then it become easier to understand.
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Returns to scale
A company’s output resulting in an increase in the input is called returns to scale. Usually returns to scale are measured at the rate at which input increases. Its slightly more complex to understand than economies of scale but in order to understand returns of scale well, the information regarding economies of scale also is highly required. There are also several types of returns of scale including constant returns to scale, increasing returns to scale and diminishing returns to scale. If any company’s output increases with the same rate of input that will be called constant to scale and if the input increases at higher rate it will be called increasing returns to scale while if this rate is lower than it will be called decreasing returns of scale. Although it might sound complicated but it is rather easy economic principle which is highlighted when there is a discussion regarding scaling of economies.
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