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Economies of scale are decreases in cost as a direct result of increase in volume. There are several types of internal economies of scale.

Technical economies of scale

When a company is large enough to purchase and run bigger, better, more efficient and more costly machinery. With this bigger machinery that can output a lot more, they can begin mass production at a lower running cost. This generally only works when a product is standardized enough for long production runs.

Managerial economies of scale

When a firm is large enough to hire specialists in various fields that are very skilled at what they do, rather than requiring more general managers. These specialists can then aim to reduce costs by applying their expertise to the company.

Marketing economies of scale

These occur when a firm is large enough to employ mass marketing strategies, such as TV advertising.

Financial economies of scale

An example of a financial economy of scale (thanks Jurph) would be a payroll department with five employees capable of doing payroll for 1 million other employees. If a company has all million employees, they are working at maximum efficiency and therefore save money.

Risk-bearing economies of scale

If a company is big enough to stomach the risk of diversifying, then it can diversify so much that it can be sure not all of its enterprises will fail.

As you can see, all of the above require a fairly big capital injection initially, but should provide more benefit in the long run. This is the principle of economies of scale.

The average total cost is used to analyse economies of scale. Average total cost is cost per unit divided by output. If there are economies of scale to be reaped, ATC will fall as output rises. If ATC rises as output rises, the company is experiencing diseconomies of scale, meaning it has gone beyond its optimum size.