Full text: Introduction

dimension* 1 : If the surface area of a container (related to the cost) increases 
with the square of a certain factor, the volume (related to capacity) increases 
with the cube of this factor. As a consequence the cost of equipment K is given by 
K = a x b 
where x denotes capacity, a a constant and b the so-called scale factor which 
according to the above reasoning should be around 2/3; in practice it takes 
different values for different kind of plant, in most cases rather lower than 
one, the difference indicating the amount of the economies of scale. The scale 
factors (b) are much used in practice by engineers making estimates of the cost 
of equipment. 
According to the engineering data, automation also decreases the capital 
coefficient, increasing at the same time the scale of production. This is partly 
explained by continuous running in three shifts, but more basically by the con 
tinuity of utilisation inherent in the technique itself. 
All this is not to say that the capital-coefficient never increases with 
size. In fact, there are cases when it must so increase: for example, large 
units (of presses, etc.) are used even though they increase the capital coefficient 
and yield a lower return on most ordinary jobs, because certain jobs cannot be 
performed at all without the very large equipment. Again, the capital-coefficient 
will depend inter alia on prices of equipment and wages. In development countries 
where modern large scale equipment is imported the price relations may cause the 
capital coefficient to be quite different from what has been quoted above. 
In advanced countries, however, the decline in the capital-coefficient with size 
seems predominant. 
There are certain general factors which act in the opposite direction: 
An increase in scale (and consequently, markets) involves additional investment 
in transport and communication, power, etc., in short, an infra-structure 
increasing disproportionately more than the firm's capacity. The burden of this 
investment is, however, ordinarily not borne by the firms, but for the greater 
This may partly explain data given by A. K. Sen: Choice of Techniques, 
Oxford 1960 (Appendix C) and G. K. Boon: Economic Choice of Human and 
Physical Factors in Production, Amsterdam 1964.

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