Economies Scale: 

All factors of production are variable In the long run, and how the output of a firm responds to a change in factor inputs is called returns to scale. The term economies of scale or increasing returns to scale is usually described by indivisibility. Increasing returns to scale occur when the percentage change in output is greater percentage change in inputs. Some methods of production can only work on a large scale either because they require large scale machinery, or because they require a great deal of division of labor. Since these large scale methods cannot be divided up to produce small amounts of output, it is necessary to use less productive methods to produce the smaller amounts. Thus, costs increase less than in proportion to output and average costs decline as output increases. Increasing Returns to Scale is also known as economies of scale and as decreasing costs. Constant returns to scale are also known as constant costs. Constant returns to scale occur when the percentage change in output is equal to the percentage change in inputs. Decreasing returns to scale occur when the percentage change in output less than the percentage change in inputs. Decreasing returns to scale are associated with problems of management of large, multi-unit firms. A firm in which production takes place by a large number of units does the same thing but the different units need to be coordinated by a central management. The management faces a trade off, and if they don't spend much on management, the coordination will be poor, leading to waste of resources, and higher cost. If they do spend a lot on management, that will raise costs in itself. The bigger the output is, the more units there are, and the worse this trade-off becomes, there is an increase in costs. Decreasing Returns to Scale is also known as diseconomies of scale and as increasing costs.