•Causes of economies of scale:
1.Indivisible input:
●Some capital input (e.g. machine) cannot be scaled down for small operation.
●As output increases, the average cost decreases because the cost of the indivisible input is spread over more output.
2.Factor specialization:
●Specialization (specialized skills of workers) leads to economies of scale.
●Case 1: Production is divided in to several processes, each process is taken care of by one worker.
●Case 2: All production processes are taken care of by one worker.
●Which case is more efficient?