CHAPTER 6: ECONOMIES AND DISECONOMIES OF SCALE
1. Economies of Scale and Long run Average Cost.
Economies of scale is a concept whereby is a firm is able to produce
more (or what is known as greater scale) then this firm is able to reduce
its average cost of production. The ability to produce at the lowest point
of the long run average cost (LRAC) curve, AC0, is called productive
efficiency.
Long run average cost is the cost curve represents average cost when
all factors of production is variable. Unlike short run average cost
which represents cost when at least one factor of production is fixed
(eg. Capital).
All the output Q before Qs give rise to economies of scale whereby
the average cost is falling before it reaches MES.
All output after achieving Qs will give rise to rising LRAC . We say that
after Qs, there will be diseconomies of scale.
2. Minimum Efficient Scale.
The minimum efficiency scale is the output (Qs in the diagram above)
where a firm must be able to produce in order to be able to produce at th
lowest average cost, AC0.
3a. Sources of Internal Economies of Scale.
Why does the average cost keeps falling towards the MES before
reaching Qs? This is because of various factors as stated below:
Financial EOS – When a company can produce large amount of goods
and services, this means that they are a large and stable company with
high revenues and profits. The banks will have more confidence in these
companies and as such will lend them loans at lower cost.
1. Economies of Scale and Long run Average Cost.
Economies of scale is a concept whereby is a firm is able to produce
more (or what is known as greater scale) then this firm is able to reduce
its average cost of production. The ability to produce at the lowest point
of the long run average cost (LRAC) curve, AC0, is called productive
efficiency.
Long run average cost is the cost curve represents average cost when
all factors of production is variable. Unlike short run average cost
which represents cost when at least one factor of production is fixed
(eg. Capital).
All the output Q before Qs give rise to economies of scale whereby
the average cost is falling before it reaches MES.
All output after achieving Qs will give rise to rising LRAC . We say that
after Qs, there will be diseconomies of scale.
2. Minimum Efficient Scale.
The minimum efficiency scale is the output (Qs in the diagram above)
where a firm must be able to produce in order to be able to produce at th
lowest average cost, AC0.
3a. Sources of Internal Economies of Scale.
Why does the average cost keeps falling towards the MES before
reaching Qs? This is because of various factors as stated below:
Financial EOS – When a company can produce large amount of goods
and services, this means that they are a large and stable company with
high revenues and profits. The banks will have more confidence in these
companies and as such will lend them loans at lower cost.
