Economies of Scale

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Economies of scale Definition
Reduction in long-run average and marginal costs, due to increase in size of an operating unit (a factory or plant, for example). Economics of scale can be internal to a firm (cost reduction due to technological and management factors) or external (cost reduction due to the effect of technology in an industry).

Diseconomies of scale Definition
Increase in long-term average cost of production as the scale of operations increases beyond a certain level. This anomaly may be caused by factors such as (1) over-crowding where men and machines get in each other's way, (2) greater wastage due to lack of coordination, or (3) a mismatch between the optimum outputs of different operations. | Economies and Diseconomies of Scale | In the long run all factors of production are variable; the whole scale of production can change. In this note we look at economies and diseconomies of large scale production.Economies of scaleEconomies of scale are the cost advantages exploited by expanding the scale of production in the long run. The effect is to reduce long run average costs over a range of output. These lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices. But economies of scale also give a business a competitive advantage in the market-place. They lead to lower prices and higher profits! The table below shows a simple representation of economies of scale. We make no distinction between fixed and variable costs in the long run because all factors of production can be varied. As long as the long run average total cost (LRAC) is declining, economies of scale are being exploited. Long Run Output (Units) | Total Costs (£s) | Long Run Average Cost (£ per unit) | 1000 | 12000 | 12 | 2000 | 20000 | 10 | 5000 | 45000 | 9 | 10000 | 80000 | 8 | 20000 | 144000 | 7.2 | 50000 | 330000 | 6.6 | 100000 | 640000 | 6.4 | 500000 | 3000000 | 6 |
Returns to scale and costs

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