Types of Economies in Production, Distribution and Consumption

Main Types of Economies in Production Distribution and Consumption

Activities involved in production (manufacturing), distribution (transportation), and consumption (retail) are constantly seeking economies to improve their margin, competitiveness, and increase their market share. This is commonly done by opting for specific locations and types of facilities. The main five economies are:

  • Economies of transportation. Relate to the benefits that lower transport costs may grant to specific activity sectors and are derived from a locational choice. For production, it relates to a location that minimizes total transport costs (accessibility to suppliers and customers) and lowers production unit costs. Weber’s location triangles are standard approaches to such problems that minimize transportation costs. Economies of transportation in distribution consider the management of transport chains, often of several modes, to reduce total transport costs (modal and intermodal). Some are elements of transport costs in production, while others are elements of transport costs in consumption. Economies of transportation in consumption can be derived from economies in distribution as well as accessibility (proximity) to customers.
  • Economies of scale. Relate to the benefits that scale may offer to activity sectors. For production, the larger the production plant, the lower the unit costs since fixed costs (e.g. the factory) are spread over a larger quantity of units. For transportation, the principle involves unit cost reduction derived from larger modes (e.g. megaships), terminals, and distribution centers; the massification of transportation. For consumption, larger retail outlets tend to reduce input costs, underlining the success of large megastore chains such as Wal-Mart. This concept is also implying that diseconomies of scale can be reached after a certain size, particularly through growing complexity and management costs. Diseconomies vary substantially by the type of activity; steel production is prone to large economies of scale, while restoration is much less so.
  • Economies of scope. Relate to the benefits derived by expanding the range of goods and services. For production, they are commonly based on product diversification and flexible manufacturing systems able to produce a variety of products in view of changes in demand and consumer preferences. For distribution, economies of scope are significant and commonly achieved when a transporter is able to bundle several different loads into fewer loads. For instance, a containership is able to bundle the loads (and offer economies of scale) for several customers in often completely different activity sectors that share a similar origin and destination. For consumption, activities offering a wider range of goods or services are usually able to attract more customers since they have more choices. Economies of scale and economies of scope are highly related.
  • Agglomeration economies. The benefits are derived from locating in proximity to other activities, even if the location is suboptimal. Often referred to as the clustering effect, and involves the sharing of common infrastructures such as roads and utilities. For production, industrial and service linkages are offered as respective suppliers and customers benefit from proximity and interactions. The outcome is a manufacturing cluster. A similar trend is observed in freight distribution as logistics activities tend to cluster and often co-locate next to an intermodal terminal. For consumption, commercial districts or shopping malls are a common expression of the benefits of agglomeration.
  • Economies of density. The benefits derived from the increasing density of features on the costs of accessing them. For production, this could involve access to a larger labor pool (and skills) or resources (e.g. mining, agriculture). Higher market densities reduce distribution costs as shorter distances service the same number of customers and freight volume. A similar rationale applies to consumption, where higher market densities involve higher accessibility levels to goods and services. High densities can also lead to diseconomies, particularly with congestion.

Many of these economies are interdependent.