Economies of scale are an important aspect of efficiency in production .Economies of can henceforth be define as ‘the reduction in average costs of production, that occur as a firm increases in size’.
As businesses grow and their outputs increases,they commonly benefit from a reduction in average costs of production.Total costs will increase with the increase in output,but the cost of producing each unit falls as output increases .The reduction in average cost is what gives larger firms a competitive advantage over small firms .The fall in average costs as output increases are known as Economies of scale. Costs in the short and long run
In the short run costs can be both variable or fixed ,but in the long run all costs become variable.Its this switch to all costs becoming variable that separates the short run from the long run. A good and simple example to help understand the division between short and long run is G4s which offers parcel delivery , They run 3 vans both of which are leased ,with 3yrs to run.The leasing charges of Ksh.s 40000 are fixed for the term of the lease .For the firm the short run will be two years, as part of their costs are fixed for this period of time.If at the end of the two year period they are able to negotiate better leasing terms because they have established the company as a good risk, or bercause they now wish to lease 7 vans, they are benefiting from economies of scale . Alternatively they may wish to buy the new vans or, if things have not gone well, even withdrawal from the business.The fixed costs, until they commit themselves to a new agreement , become variable.
Each firms long run average cost curve is made up of a series of short run average cost curves. As a...