Economies of Scale in Industrial Plants

Abstract

T HIS paper presents evidence derived from engineering data on economies of scale in manufacturing and processing plants. The evidence presented here relates solely to production cost. Costs associated with factors such as marketing, general overhead, transportation, dispersal of market, and raw materials are excluded from this study. The chief purpose underlying this research was to provide some empirical justification for investigations into the nature and extent of investment barriers created by economies of scale in less developed countries.' In light of this purpose, certain dynamic phenomena (such as learning curves) that have a scale effect will also be discussed briefly. Our main conclusion is that in many basic industries, such as petroleum refining, primary metals, and electric power, economies of scale are found up to very large plant sizes (often the largest built or contemplated). These economies occur mostly in the initial investment cost and in operating labor cost, with no significant economies observed in raw material cost. Scale economies can also result from learning curve effects, spreading of set-up costs, and certain stochastic processes associated with inventories. With some reservations, we feel that