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Encyclopedia > Economies of scale
The increase in output from Q to Q2 causes a decrease in the average cost of each unit from C to C1.

Economies of scale characterizes a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... In economic models, the long run time frame assumes no fixed factors of production. ... Marginal cost is a term in economics. ...


Economies of scale can be enjoyed by any size firm expanding its scale of operation. The common ones are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. To gain control of an asset in exchange for a valuable consideration. ... For other senses of this word, see interest (disambiguation). ... Wikibooks has more about this subject: Marketing Look up marketing in Wiktionary, the free dictionary. ... A media market, broadcast market, media region, designated market area, DMA or simply market is a region where the population can receive the same (or similar) television and radio station offerings, and may also include other types of media including newspapers and Internet content. ... The long run average cost (LRAC or LAC) curve illustrates - for a given quantity of production - the average cost per unit which a firm faces in the long run (i. ... In Economics, short-run refers to the decision-making time frame of a firm in which at least one factor of production is fixed. ...


This should not be confused with increasing returns to scale which is represented by the SRATC where simply increasing output within current capacity reduces the short run cost per unit.


This is, of course, an extremely simplistic example and, in real life, there are countering forces of diseconomies of scale. As these forces balance, an optimum production volume can be found (referred to as constant returns to scale). The rising part of the long-run average cost curve illustrates the effect of diseconomies of scale. ... In economics, returns to scale and economies of scale are related terms that describe what happens as the scale of production increases. ...


This principle can be equally applied to an organization resulting in firms within a particular industry tending to be similar sizes. Economists have studied this effect as the theory of the firm. // Definition The ideal firm size is the theoretically most competitive size for any company, in a given industry, at a given time; which should ideally correspond with the highest possible per-unit profit. ... The theory of the firm consists of a number of economic theories which describe the nature of the firm (company or corporation), including its behaviour and its relationship with the market. ...


A natural monopoly is often defined as a firm which enjoys economies of scale for all reasonable firm sizes; because it is always more efficient for one firm to expand than for new firms to be established, the natural monopoly has no competition. However, standard economic theory also holds that on account of the unique shapes of the natural monopoly's LRAC and SRAC, it can never experience economic profit and thus requires subsidies or other government intervention to remain profitable. In economics, the term natural monopoly is used to refer to two different things. ... It has been suggested that this article or section be merged with profit. ...


In the short run at least one factor of production is fixed. Therefore the SRAC curve will fall and then rise as diminishing returns sets in. In the long run however all factors of production vary and therefore the LRAC curve will fall and then rise according to economies and diseconomies of scale.


See also

The rising part of the long-run average cost curve illustrates the effect of diseconomies of scale. ... // Definition The ideal firm size is the theoretically most competitive size for any company, in a given industry, at a given time; which should ideally correspond with the highest possible per-unit profit. ... This article or section does not cite any references or sources. ... The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in an October 2004 Wired magazine article[1] to describe certain business and economic models such as Amazon. ...

External link

  • Economies of Scale Definition by The Linux Information Project (LINFO)

  Results from FactBites:
 
Returns to scale - Wikipedia, the free encyclopedia (619 words)
When combined, economies of scale and diseconomies of scale lead to ideal firm size theory, which states that per-unit costs decrease until they reach a certain minimum, then increase as the firm size increases further.
Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production (both in absolute terms, and, especially, relative to the size of the market).
Network externalities resemble economies of scale, but they are not considered such because they are a function of the number of users of a good or service in an industry, not of the production efficiency within a business.
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