Lecture Notes: Economies of Scale

Key Concepts

• Economies of Scale: Cost advantages that enterprises obtain due to size, output, or scale of operation.
  • Inverse Relationship: When output quantity increases, per unit fixed cost and average variable cost decrease.
  • Leads to greater operational efficiency and synergy.

Long Run Average Cost

• Chart Explanation:
  • Vertical Axis: Cost
  • Horizontal Axis: Output
  • Orange Line: Represents long run average cost of production.
  • Initial high cost at low output; as production increases, cost decreases.
  • Lowest cost at production point Q2.
  • Beyond Q2, producing more can lead to diseconomies of scale.

Types of Economies of Scale

1. Internal Economies of Scale

   • Unique to the firm.
   • Examples: Patents, special machines, unique technology.

2. External Economies of Scale

   • Applied to the entire industry.
   • Example: Changes in government taxation.

Sources of Economies of Scale

1. Purchasing

   • Bulk buying results in lower prices.

2. Managerial Capacity

   • Efficient management lowers costs.

3. Technological Advances

   • Technological edge increases efficiency and productivity, lowering costs.

Diseconomies of Scale

• Occur when average cost increases as production increases.
• Long run average cost rises at point Q3 where complexity or fixed costs increase excessively.
• Examples include increased complexity and need for more fixed costs as volume rises.

Thank you for joining the economies of scale tutorial.