Economy of Scale Law and Legal Definition

Economy of scale means a cost advantage that a business receives due to expansion in the production. As a result of the increased output there will be a decline in a product’s per unit production cost. In general there are two types of economies of scale namely, external economies in which the cost per unit depends on the size of the industry and not the firm and internal economies in which the cost per unit depends on size of the individual firm.

In In re Am. Mut. Funds Fee Litig., 2009 U.S. Dist. LEXIS 120597 (D. Cal. 2009), the court observed that “Economies of scale exist when the per unit cost of performing fund transactions decreases as the number of transactions increases. The concept of economies of scale assumes that as a mutual fund increases in size, its operational costs decrease proportionally. The concept of economies of scale is meaningful only if increased size of a fund (more shareholders, more assets under management) directly reduces the manager's costs of processing each transaction and servicing each shareholder. Plaintiffs in an action under § 36(b) of the Investment Company Act of 1940, 15 U.S.C.S. § 80a-35(b), bear the burden of proof with respect to economies of scale. This requires plaintiffs to establish that economies of scale were realized in the first place, separate and apart from their burden of proving that any scale economies were not adequately shared with investors. Demonstrating that the ratio of fee based expenses to fee based revenues declined at a time when the fund size grew does not establish that such a decline was necessarily due to economies of scale. Rather, plaintiffs must create a detailed analysis of each element of a transaction surrounding the fund, over an extended period of time, over different levels of activity. This requires plaintiffs to show that the per-unit operating costs of the adviser and its affiliates decreased as fund size increased.”