Economies of Scale in New Equipment Purchase

If b equals 1, then costs rise proportionately with output. If b is less than 1, costs rise less than in proportion to output. We can interpret b as the percentage increase in costs that results when capacity expands by 1 percent.

Haldi and Whitcomb estimated separate cost relationships for 687 different types of common industrial equipment and found that costs do not increase in proportion to capacity even at very large capacities. As summarized in Table 2.4, for all but 5.4 percent of the products, b is less than 1, indicating economies of scale in the purchase of new equipment. In other words, their data "support the conclusion that there are increasing returns in equipment up to and including the largest sizes built" (p. 377). This result does not imply that all aspects of a firm's average costs decline with output, only that the cost of new equipment does.

TABLE 2.4 Estimates of Economy of Scale in the Purchase of New Equipment

SOURCE: Haldi and Whitcomb (1967, 376)

Economies of Scale in Operating Costs

TABLE 2.5 Economies of Scale in Operating Cost

SOURCE: Haldi and Whitcomb (1967, 382).

SOURCE:

Haldi, John, and David Whitcomb. 1967. "Economies of Scale in Industrial Plants." Journal of Political Economy 75:373-85.