Cost Analysis

Cost denotes 111e amounl or ,muney 1hat a mmpiln,

1

spends on the aearion or production of goods or

All e,1pe,nses arel costs. bu1 all costs are not expensest
Cosr is mo,e dose to 1expenditure~
 fl js used for ann1),71ng tlle cos-:t n.f a p,rojieet in short nr1,d
Jor1:g .r un .

J.n ,0 u1 cr 1.vo.rd. ,-a.st is the swn trrlril: of explicit eost &

h:np Jicif: ,LLO.', 'I.
_ E\'.JJ•l'Ici:t ros[ ms actual u1,o ncy exp,end,i1ru:1',c oar i npu:l o:r
fN1.vu11en:t n1ade t~l' ou:t.sid,e rs for )l!irin~ :Uieir fac !L,n,r
•
ser,·rces.
- Jn111,!jci t t'r,.s:t is tht~ cslin1 tli lc ,rnhu.' ,o f inp11:ts :~.up1pHt:~d
lli,. tlu:_• o1.v:n1crs including iiorn:1.al r1rofit.
~ -
Fixed Costs (FC) The costs which
don't vary with changing output.
Fixed costs might include the cost of
building a factory, insurance and legal
bills. Even if your output changes or
you don't produce anything, your
fixed costs stay the same. In the
above example, fixed costs are
always£ 1,000.

Variable Costs (VC) Costs which

depend on the output produced. For
example, if you produce more cars,
you have to use more raw materials
such as metal. This is a variable cost.

Semi-Variable Cost. Labour might be

a semi-variable cost. If you produce
more cars, you need to employ more
workers; this is a variable cost.
However, even if you didn't produce
any cars, you may still need som t--:7
workers to look after an empty ~
factory.
Explicit costs - these are costs that a
firm directly pays for and can be seen
on the accounting sheet. Explicit
costs can be variable or fixed, just a
clear amount.

Implicit costs - these are

opportunity costs, which do not
necessarily appear on its balance
sheet but affect the firm. For
example, if a firm used its assets, like
a printing press to print leaflets for a
charity, it means that it loses out on
revenue from producing commercial
leaflets.

Market Failure

• Social Costs. This is the total

cost to society. It will include
the private costs plus also the
external cost (cost incurre<fil
a third party). May also be c:J
cost= £550.

Accounting Costs - this is the

monetary outlay for producing a
certain good. Accounting costs will
include your variable and fixed costs
you have to pay.

Sunk Costs. These are costs that

have been incurred and cannot be
recouped. If you left the industry, you
could not reclaim sunk costs. For
example, if you spend money on
advertising to enter an industry, you
can never claim these costs back. If
you buy a machine, you might be
able to sell if you leave the industry.
See: Sunk cost fallacy

Avoidable Costs. Costs that can be

avoided. If you stop producing cars,
you don't have to pay for extra rcr-w:---i
materials and electricity. Someti ~
known as an escapable cost.
Total Costs (TC) = Fixed + Variable
Costs

Marginal Costs - Marginal cost is the

cost of producing an extra unit. If the
total cost of 3 units is 1550, and the
total cost of 4 units is 1900. The
marginal cost of the 4th unit is 350.

Opportunity Cost - Opportunity cost

is the next best alternative foregone.
If you invest £1 million in developing a
cure for pancreatic cancer, the
opportunity cost is that you can't use
that money to invest in developing a
cure for skin cancer.

Economic Cost. Economic cost

includes both the actual direct costs
(accounting costs) plus the
opportunity cost. For example, if you
take time off work to a training r;l
scheme. You may lose a weeks p~
£350, plus also have to pay the direct
Total costs

Fixed, variable and total costs

£ TC

FC

vc

300 F----+-----__,,..----FC

Q
www.~ .oro

Total cost (TC)= Variable cost (VC) +

fixed costs (FC)
 These laws of re turns c a u u c ~1 1v vv •• .J ~- · - __ 'J
-
t R u n P r o d u c ti o n Function
Chart 1 : S h o r
L a w s o f R e tu rn s

Law of Diminii
L a w o f Constant
Law of Returns
sing R eturns R e tu rn s
Increa • ,

mP
•

is o ne law o f p rod uctio n

Modem conomists consider that there
O

. N ,
se t e ro po rt,o n s. ow
o f d .
hree laws pro uct1on. It is c a ll e d law · · o f v 3= riab le ~p
;cuss 11 ese I ··
a th on e b y o n e a s giv en b e lo w:
aws of returns
f I n c r e a s in g R e tu rns
Acco ct · L a w o
.ts .a
re
,~ .-·
kept .Ji)
·
in g to th O

I O

o n w h e n fe ~ ~_.1
•

n pu • the prod uct

ther - . bier -f- is a w o f p ro d u c ti - -e-- · • , n-~ -~- ·. · -
vana . 1-
F;~:::::~;
tors f 1 /ase
1
e rn•t10re h --ac .- ,·"--~o-~~pr- 2d-,.':1S!!._9_n ~_<!.f.e c han geQ , the J_n fr
~~ - -_ . t an in
l~~:~:~:l:bou9r f ~1~:~r~ t-C? tlj~ c h ~ n w if ;~ ~ r
ctor
s
~
9 f
[J
p
~ B
ro
~
d u
u
c
f
~ion.
~ ~ ~ . ~ ~ ~ - ;;~ ,t
sa,q th~t ~h:-! -Ptr C ;e nt _ h
1s ~ e p t
tl ,
a s a fi x e d fa
.• ~· u1 t increa~es~ ].
- b~j.]_,J.D .~ ~!.J..•?~
,,;:,...,-
 ~ ___ _
re
un lw o
,t· VaJ JU "- ' -
l e
-

d t h e L a w o r L ,u 1 1 .: ll .U .1 &
. w o f d i m i m s h m;
· Ja w is ca l • t u r n s a n d the l a
c reasm g r e tp ..r
.perat1ng h e l a w o f m e n t a n d th e o u
:J~ midpoint b
1
etween t c h a n g e d b y 1 0 per c
v a r i a b l e i n p u t s are f a c t o r c o n sta.n
i f t h e ts o f a f i x e d
tecurns. For example, r cent k e e p i n g t h e u n i
rea s e s P} : I O p e
of the firm also i!]c ate.
e t u r n s w i l l o p e r o f th e la \l iS ,
:~e law of cons ta nt r l , " I f the ac ti o n s
l f r e d M a r s h a l n sw
t o P r o f e s s o r A t h e l a w o f c o
~ According b a l a n c e d , w e hav e
h i n g r e t u r n s are
in i s
increasing and d i m
rewms . 11
r o d u c t iv e s e r v i~ es :
" W h e n a l l the p
g l e r h a s d e f i nes, e p r o p c r ti on ."
Professo r S t i r e a s e d in the s a m
th e p r o du c t i s in c
g ive n p r o p o r ti o n , w h e n th e la\"
;ncr e a sed in a
nt returns a p p li e s. .
t h e l a w o f c o n sta , h e
th e c an s a y t h a t . . .
oe s n o t o p e ra te . T
i , as1.n us, w .
d i mi n i s h i n g r e tu rn s d
ncre
st0 P a n d t h e la w o f c t l ! P ) , ~.\,\~~,
can be g re~ums w i n g T o ta l Pro ~ u
o f a T a b l e3 s h o i (l a
w ith t~ e h e l p va r ia b l e m p u t!
i>roductei;med d u c t ( M P ) w h e n th e u nits o f
· . b e lo w ··
d M a rgm al P r o tV e n
. an d capital) ) an
~tp ,.? P s tan t,_ a s ;
ch an ct· k • o t h e r f i x e d in p - J J 1 5 ~ 0 9
are ge eepmg - -D-IL
-U t U li ll S o·
r va na n,e 11 ., p t u ... ~t..·llI" J M :. 11 i~1.1,~,1 <. ' '".\ 1,i1,,, ·
•-
•.
,
. I
• H '

IJ ~. c;~ XJJ· H.., . . (AC ' a.n · .

,'"J,

1. '
1
) o,
,
, (l\-Jc , (\1
. .

Tll e a\v ca n u ,\O ,t.; ws:

iJ/ bt:: ;JS /i)J/o
-,pr e C .O J 'V ,,
aUd ·MP. are constant th. ec:J,n,Iw'' r_c.l,'nP1 w .
J\ ') Ii

constant . T11c ' c

S, ine a
a n d y

- - - AC~Mc
L-----

- - - - - - , X
oL ----
f V ar iab le I nputs
Units o
o n s t a n t R e t urns
iagram 4 : L aw of C ble inputs on r
D f v aria
o st o n is and units o
O Y-ax :1 t and AC and
n
gra m s h o w s c em a i ns c o n s t
Th e dia
p u ts the cos t r pe ra tes. .
v a r ia b le in a n t c o s t o
With the chan
ge in the
ca u s e th e la w o f const
d by the sa m e curve be t u rns
repre sen te n i s h i n g R e
L a w o f Dimi le ss th a n in proportio
in e ss f ir m increases s c on stant, th
tput o f a b u s
e r f ix e d l n p u t
\1/h €n the ou p u ts k e e p in g o th
e va ria ble in/
va ri ab le in W h e n t h
change in the units o f
ing ret urns. F or example,
o f dimin is h
called the law I
 . ., uni t ;• .. , r • . ·h ~ . . 111t
AP d . . .s whtlr;; ,.1,ung~ in t '-· units t f' ,i
an MP are shown on ov-- nxi. . t thC (,, > v .
, 0 ·x- .\
, axis. Both AP and MP are tnll 10 £
..
r, w1r 1
·
•11

tputs. hC 1Jaw
fofl oft ~
Modern Vers portJon~
1--..~ of \lorisblC .pro . o•r di1nit1ishing return s 'Will1\
. . , aw
I, ~·' • . 1aw n
11
Prof. Alfred M~rshall explaincJ. :~put is kep~ ~·ix~d a J units of v~
·~ference to agriculture when the land a~ . Jaw of dimtntShtng returns W1l1 111
,nputs (labour and capital) arc changed, t, ;plies to agriculture only. But the n:
In other ~,ords at:cordin g to him, the Jaw bai son, l{.E. Boulding have explain .
Joan Ro n . f . d. , . t
econon\i~ts like Bcnhan1, rs. .M . ble to aJI frontiers o pro ~ct1on anu ·
. h I#w t~ apphca . . '
la,v and po,nted out th at t e a . h Jaw of vanable proportions becau~
• kn own as t .e 1e
universal law. The law ,s a1so portion of fixed and variable .
every in~re-ase in variable inputs th e pro Ir

undergoes change. .
According to Professor Benham, "As the pro~ort1on of one factor
combination of fac tors is increased, after a point the marginal and average proa~
the factor will diminish.''
Mrs. Joan Robinson has defined, "The law of diminishing returns, 3J
usually fonnulated. states that with a fixed amount of any one factor of proa~(
suc,eessi~e i~creases in the amount of other factors will, after a point, ~if
dtmuushmg mcremenr of the product. 11

Thus. we can say that the mode .

apphcable ro all areas of d . m verSion of the law of diminishing rew~
. pro uct1on and it is c 00s1.d .
apphes as soon as marg· al ered universally applicable li
. m product dee lin .
mpu;s. keeping fixed input co es wi th the change in the units of vM,
Vt •L~ th~ h 1 ~ nstant. The Jaw of .
c eP 01 the fo llowing table: vanable proportions can be exr1:

___ Law of Variable PropToarbt~e 5

Units of IO
v · TotaJ ns (output in quintals)
iriabJe Inputs A
naJ..~~. .· Pr0d Verage Sti
uvur & capu~J) · uct p Marginal .i
(Tp rOduct ~
I ) (AP Product r
2 ) ? GJ i·~ J') - 3~t:
 ,.,, ., .,,. .. ., ••-~. - -- ,· ·· , : ''"'1 , · 1,1 •
ecn11on1isr,~ /ik ,~ ,.
t th , , ln~v is 111>1 ,tlro l,/ ,1 ' " ull 11 , ,, ,1, .,
111 (J Jr
1

I 1I

Jn w ,uuJ poin 1,~c1 ou t tlm ,,,,, '1 ,i,,'

,1
k11ow11 Ii;~ 1/ u, l1 1w ol v11111 1/;if . 1, , 'I",,,
1,
111
,,
/Juv i.-. 11 /8 0
'' ,,, . ,,, , ,,, 1
1

u11iversn l In "'· '111 c

f

,~ p ro.
p o ll 10 11 of /i x ,,. ,,
111pot s th
I ·

1c1v,1
•
se 1n v11n t1hlt~'
1 -
/ //J (/
v, , 'u/
I

every 11 ' 111 •

I 1I

undergo es chnnge . c.J th o 11n,,Jo11, 0 , 1 " '

l'ro/(:.4JSOr 11 11
,~ /uuu , "/ \ .
A ccording t,, /' I
i 11 I I tc tt 11111~11w / mu / , 1 '>Ju, I:,,
· · ( I, n lt 'r 11 /" ' ,I Y( •JI
11,,

· ' f' t1· 1ctors l,fv ,nc rcnsc 'Jfr~/J,,"

con1b111:1t1on o · 1I.

the factor will dir11in

ish . ''
"1
'
/J c la w of <li111i11i 1 8/iink n·
s dofin t.J d~
Mrs- Joan R,,blnson lln
1111
1 o f 1111y o n e fi u ;l( ;r ,;; ' \ ;,i
with 11 tixcd t1m ou 11
ulated, st11te.~ that o ;, t'1111,,
usually fonn t o f other liiclo r.~ w ill, 11l 1(;,. 11
f>
inc reases in th e am oun I, Y1e.
successive product.''
in cre1ne nt o f the
dimin ishing o f di1niniHh, ·r1v
Thus, we ca n sa y thti
d
t
u
th e 1nodcn1 ve
ction and it is
rs
co
io
n
n
s
.
id
o
e
f th
re d
e
u
Ju
n
w
ive
· di fL: I 1
rsa lly applic:ablc t
le to all a reas o f p ro unit.q or var~-'
applicab ct declines with th e ch a ng e in the
a s m arg in a l pro du can be exp/ 111,.a
1pplies as soon f vari ab le p ro po rtio n s
g fixed input cons tant. The law o
riputs keepin
e lp o f the fo ll o w in g table:
'ith'the h
Tnble 5
ropo rtio ns (output in qujntals)
L a w o f Variable P -
Stages
A ve rag e Marginal
Units o f Total of
P rod uc t Product
roduct P J>roductio n
ariable Inputs (AP)
(W )
(TP)
bour & capital) JO
JO
10 8 Stage I
1 9
18 6
2 8 .
24 4
3 7
28 2
4 6
30 0 Stage J1
5
30
5 -2 Stage II!
6 4
28
 y

35
30 B
~rr 25 I J
II lo TP
AP 20 1
I
I
I I

I\IP 15 I
I -.
I
I
I
t ._.
10 ~ ~ \Stage llI
I ,5 I
s I , ,..
I ~, I
I

I I
0

1 2 3 4 5 6
Units of Variable &t Capital

Di ag ram 6: La w of Variable Pro por tio ns

e:; of production . The law of
The diagra n1 shows that there are three stag
retu rns or law of var iab le pro por tions app lies m the third stage. First
_~:inishing
~ec ond sta ge are con cer ned wit h the law of increasing returns and the law
'..;e and
en TP is con stant \vith the 6th un it of var iable input the MP is
:·~\msranr returns. Wh
poi nt the pro du cer sho uld not em plo y mo re of it because the MP is
-:~c. After this
falling and MP is als o falling but AP is above MP curve (AP>MP).
:= ga1ive . AP is
TP rve sho ws tha t from A to B the re is law of constant returns, and from C to
-~e cu
1
ihere is law of diminishing returns.
of dim ini shing returns or law of var iable proporti~ns. can also be
The law
terms of cost. Wh en AP and MP are falling the cosl will increase and
iplained in
AC . · MC ·ll b risi ng 1nore than AC aoct MC
'e wi e ·
1
• and MC will show rising trends.
ti! be above the AC curve (MC>AC).
2tD20 .... ·1 ? - 3 J '/ 5; '/ D
If l "hurt-I
N.,,hn·us to Sruk

hh'tt'nsing
l
C,Htstnnt Dilninishin~
"
Rc'(Hrns t't'turns 1'¢llll11$ to
tn s. .,ol<'
hh~t"<"itslna RC'tUl'l\s 10 Scali,\
\Vhc'n tht' ,hnng, in ,mtpu~ . is nu,f£. thon in proporth)n t\.) th~ t:"q~1~-
11

l''\)lhWti,lU!\l "'htUll:.~ in ntt t~1~ fll('h._ll'~ Qf pl\>l:lU~tion, then the ope.nlting law is ~:t\ll~d
tht' inct'Cllsing returns to s~i\k~. 'fhus. tho rut~ of incre:1sc.> in output is fnst~r than the
hwrttlSC in n,ct,)t~ ,)f J)l'\llillction.
..... ! - .
l 'h~ ti'istntl\'e bt! t\Vt'f.}ll vurious ,so-product f~trves dt'l"re.tlSt!.S on the ~~{X\nsion
-
... ~ . - - --~
.~~ or S(:alt' line tht'n the itK't'~using t~turns h-.l sl.:nl~ \\ ill tl{>t'rnt~:.....~v~~~ that th~:
1

itwt\'as~ in output in th~ san,t p1,,pn~rth)U t\'quit~~ lc~s rntio nf labour 1,nd l'np,tat
1'hus. outpttt inl't~nst~s n1oro thm1 in pt\)portiun to th~ units of factors of 'p roduction
<.~mptoy~d nnJ~r this lnw . It "'"nn he l~xplnin('d with the~help of Dh\gn1n, 9.
Cnpitul iu1d lnbour nn.~shtlWn on QY ...nxt~ and Q.X-nx,~ re..spt,'Ctivel)r. IP.~lP, ,
lP1 nnd lP ., nn." different iso-pt·'(ldtK~t ~urv~~ sho\ving diffet~nt. level~ of outpnt, viz.~.
to units, 20 units, ~O units and 40 units .. The distance bet\veen successive iso-produc
 :; . f f;
. - ,:
rJ 'fi J'i ~,.,.,.~ aS , rt• fnU t js , \1 a n a g e ·
:C~tf 1 /~ crn .r...r.: ..y e x p an d e d b y increasin Ti ctl b .,
r - EE En i:::b H-'/J--'"' - , ~1:•= J:- -
g
o f;.,/ :? .... . "--1. .ufCfi re ., ~ ,,, a t fo r e a u al in c re a .
th . th e S<:a le ~r ~ ,.:,r
:ess ~ Iess tirn d ~ s e 1n o u tp u L firn-i . h · h-.:z.: c.~
~ , ,..,i....-~ ·r
o u n r O• ut U \.J U a n . .,~ ' ,
r- ~ n f u: u.
~
11 a, t -~
y - ,.1 t-,.
..-~

~ 2 5 0 u n it s

Qt 100 units
0 ~--------
---♦ X
Labour
D ia g ra m 9 .: In
c re a s in g R e tu rn
Causes o f Opera s to S c a le
ting the L a w
T h e increasing
or re a s o n s : returns to scale
operates on acc
ount o f the follo
wing cans~
( Jy l n d h is ib il it
ie s o f Inputs-T
a re in d iv is ib le here are some
.. In d iv is ib il it y factors o f produ
ca n not b e divid m e a n s th a t th e y a re a v a il ction whl.::
ed in to small a b le in a give
marketing a re su pieces . Machin n shape or the!
~h exarrrp les o e , m a n a g e rs ~ re s
f in d iv is
e a rc h finance at.
,rf.tductior, the ibilities . "\\' ith 1 {
e ff ic ie n c y in c
re a se s a n d th e
th e in c re a s e in the scal
to th e c h a n g e in o u tp u t in e/
inputs . c re a s e s m o re th
a n in prop ortiot
, ~vision o
increased th e f ~ n r and
d iv
S p e c ia ~ ~ ti o ~ -\
· is io n o f Ia b o
u r a n d s p e c ia
\: 1 e n th e s c a le
p1'od u c ti o n is d h s a ti o n rs in tr o
o_fp r ~
iv id e d in to s u b d u c~ - =---- -
group o f worke -p ro c e ss e s a n d .
rs and at the sa . e a c h s u b p ro c e s s is c'-o'U . A pnxc:>~ 1:.,·
depa rtm e n ts '! v me t1me the s p . .•
iz ~, finan c e. m e c ta h s ts are a p Tl1pleted by eal.,h
a,.•1ager ~ m a rk e . p o in t . . .
;:,urchasing rnan ti
ager a n d s o o n n g m a n a g e r, Pers · e.ct fo r d1fferen l
)roducti on and and s o forth. ·
the increasing re T h e ir servic ·
es le a d t ·0 n. ne1 manager .
turns tu sea.le op · "'
~nsiona erates. 0 in
c
,perati n g d im e n l E ff ic ie n c y -I rease 1·n the
si o n a l e ff ic ien c n c re a s ing returns
· Th · y in a b u s in e s to sc.a.Je .
1:..e e Size in c re a s e s s fi rm w h ic h is on a 18
., u , the m v th e e_fficienc y the result of
eMJnent m c a p o f a ll in p
u ts a n d ~ e-rncn Ccou ·
--.1 :. "T ea ~ d i m
e ns io n o f e ff ir
it a l a s s e ts a ft e
ie n c y .
r a p o m t w il l ;,.14r • r.
mc~~ll
.oYSof
-~
~ o ' @"gr" ·
( 4-J ,E ,c n n rn• l s """""te.
 ~ c:: r3d0 0 ' • rns to Scale .
rfl' t _l{ettJ
the ou tp ut o f a fi rm in cr ea se s ·tn the same .
,¢1
( 011 WJien
.
ca ll d prop or tion in wh.ic"'h the
e la\v is e cons tan t retu rns to scale. Th
. 1·nputs takes place. th II .
111
LJ ~Q in_puts re m ain s consta nt/ Wh en a iso-product e
chaflge. •
h cu rv es showing the
rt1on tw
d1 stance be een t em on th .
of output have. the .equal
QJ
prg_P.° . e ex pa ns~o n path or
Jeve1
g r t
1s called constant e urn s to scale It ·is explained with
~ . th e Jaw op er atin .
58
Je 11o e, -- ~ -
sea ·ng diagram :
rM folJoW t Scale Line
y
"p
IP3 40 Units
IP2 30 Units
IP1 20 Units
IP 10 Units

0- - - - - - - - - ~ Labom
X

1 0 : C on st an t R et u rns to Scale
Diagram xi s respectively . IP , IP
O Y -a xi s an d O X -a
own on
Capital and labour are sh g diff er en t leve ls of output , vi 2
sh ow in
IP2and IP3 are different
iso-product curves
di stan ce be tw ee n is o- product curves
10 ts, 20 un its , 3 0 un it s and 4 0 units. The are equal. O E = EE1
. .u ni ce on ·sc ale lin e (O P )
indicated by E, E 1, E2 and 3
E . The distan constant whi
1

od uc t cu rv es re m ai ns
di st an ce between alJ iso-pr
EEi
1 == E2 E 3 . T he
ti·on 1n · wh.1ch in · puts ,
the same pr op or
revea) th at the production increases in es at the point wh,
ale. T hi s law op er at
ce , it is co n st ant returns to sc
ch an ge d. H en
ie s no r in te rn al an d e~}e,!'!!fi.,._2i~~Eonomi
ternal econom
_neit~~ the internal and ex
are en .
u rin g
~

lo
T

ng
_

period. J f'
__.-
- ---
--- -- •

·
~~y~d b y ~h e firm d
IShing Returns to Sca
le
tp ut is le ss th an th e pr op ortional~ chang
ge in ou - :..:. 1 th e d1·minish1ng re
t,
When proportionate chan . --. eq U,
alI the f actors o f production their (inputs) ra tHl b~_in g v.J
to va riC J
.. fJ 1 ?JJ~ 9i d~ ct ~u r
, v~s ~n the s
. scal e will r T h e distance between
1 n tou(out ~
li ~ ~ to1@1PJO/ .r
 11. 12
y Managerial~
t~~'.
p

- - - - - - Q3(300)
-------- Q2(~00)

- - - - - - Q1(200)

0 Lal)our
Diagram 1 1 : Dim
inish ing
R e t u r n s t o .S c a
Labour a n d c a p le
ital are e m p lo y
fine on which E e d .o n OX-axi~
, E 1,. E2 are diffe ·a n· O Y - a x is . O
rent is o -p ro d u c
t c u r v e s s h o w in
P is the i~
output. T h e dis g different leve\1.
tance between th
ese c u rv e s ~re
show t~at w e hav in c r e a s in g o n
th e scale line w~~
e to e m rl ~ y ~ o
?roport1on to th r e o f inputs a n d
e change 1n in ·th e r e s u lt a n t o
·etu m s to scale. p u ts . 0 E<EE <E E w u tp u t is less th an_:
1 1 2 h ic h s h o w the
diminisM
~auses o f Opera
nng the IA ,w
The diminishing
easons : returns to scale
operates on a c
c o u n t o f the fo
~seconomie lio ~
1e internal a n d
s o f Large Scale-W
e x te hen th e
,. rn a l d is e conomies o f s
is e c o n o m ie s th e . c a le sea 1e o f P i
o u tp u t increases . ~ . ro d u c ti o n is increh~~
less than 1n ~ m e rg e . o
1d the diminishin
g returns to scale p ro p o rt · n a
--co
c f t •'
operates. Ion to th e h . '1nt O i1t
.
~ elay in D
e c is io n -m a k in g
c a n g e 1n the io rv
:ale o f productio a n d it s h n p te
n the decisions ·· ., . . ,- . . i\
decision-making a re ta k e n a t d if ll le n ~~
fe re n t ~Q.? D- ·~p.iz- "~ I
. .
·oportion to th e
and 1ts 1mplem
entat1.on lead to
<r ~-~ t h
·eJs Of tn th\ ·:e;.st·leu
c in<'r ~ . _