Economies of Scale

• What is meant by constant returns to scale?


  When long run average cost (LRAC) remains constant as output increases because output is rising in proportion to inputs used.
• What is meant by diseconomies of scale?


  A business may expand beyond the optimal size and see rising long run average cost (LRAC).
• What is meant by economies of scope?


  When it is cheaper to produce a range of products - cost savings from product diversification.
• What is meant by external economies of scale?


  When expansion of an industry leads to the growth of additional services causing a downward sloping industry supply curve.
• What is meant by increasing returns to scale?


  This means economies of scale, when output is rising faster than inputs when all inputs can be varied in the long run.
• What is meant by minimum efficient scale? 


  Where internal economies of scale have been fully exploited. This corresponds to the lowest point on the firm’s long run average cost curve (LRAC).
• What is the definition of economies of scale?


  When increased output leads to lower long run average costs.
• What is the concept of economies of scale?

  Economies of scale occurs when increased output leads to lower long run average cost.
• How does the size of a firm affect its average costs?

  A small firm has higher average costs compared to larger firms.
• What happens to average costs when output is increased?

  Increasing output leads to lower average cost.
• What does the LRAC curve represent in the context of economies of scale?

  The LRAC curve shows the long run average cost as output increases.
• What is the significance of Q₁ in the context of economies of scale?


  Economies of scale occurs up to Q₁.
• What happens after the output level Q₁ is reached?

  After Q₁, dis-economies of scale starts to occur.
• What are the key points of the concept of economies of scale?

  • Increased output leads to lower long run average cost.
  • Small firms have higher average costs.
  • Increasing output reduces average costs up to a certain point (Q₁).
  • Beyond Q₁, dis-economies of scale occur.
• What does the economies of scale curve look like? 


  DIAGRAM BELOW:

  
• What is meant by internal economies of scale?


  Measures a company’s efficiency of production. That efficiency is attained as the company improves output when the average cost per product drops.