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Economies of Scale
Economies of Scale
Economies of scale refer to the cost advantage brought about by an increase in the
output of a product. Economies of scale arise due to the inverse relationship
between the per-unit fixed cost and the quantity produced – the greater the
production, the lower the fixed costs per unit. This is because the production costs
have been spread out over a large number of goods. As a result, synergies and
operational efficiency cause a reduction in variable costs. From this, economies of
scale can be divided into two categories:
A family wants to print wedding invitation cards for their daughter’s wedding. Printing
500 cards costs $1,000. However, printing 1,000 invitation cards will cost them
$1,500. Therefore, while printing 500 cards will cost them $2 per invitation card,
printing 1,000 copies will cost $1.5 per card. This is because the price will fall after
the initial set-up costs of the printer have been covered. As a result, this leaves only
a marginal extra printing cost for every additional card.
This usually happens when a firm becomes too big. It is represented on the following
graph when going from Q1 to Q2. Beyond point Q1, which is the ideal firm size,
producing more goods increases per-unit costs.
Question
A firm that increases the quantity it produces without any change in per-unit cost is
experiencing:
A. economies of scale;
B. diseconomies of scale; or
Solution