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8. Understanding Economies and Diseconomies of Scale

f. describe how economies of scale and diseconomies of scale affect costs.

What are economies of scale? Economies of scale are reductions in the firm’s per-unit costs that are associated with the use of large plants to produce a large volume of output.

What are the four reasons that economies of scale can exist? 1. Mass production is more economical. 2. Specialization of labor and equipment improves productivity. 3. Workers at a larger firm tend to learn more from their experience. 4. Bargaining power in input price.

What are some examples of diseconomies of scale? Bureaucracy, bottlenecks, communication breakdowns

What are constant returns to scale? Constant returns to scale are when unit costs don’t change despite having a larger plant (operation).

What is minimum efficient scale? Minimum efficient scale is the smallest quantity of output at which the long-run average cost reaches its lowest level. If the long-run average cost curve is U-shaped, the minimum point identifies the minimum efficient scale output level.