Topic 5- Economies of scale, Imperfect competition and int. trade

What are Economies of Scale?

Economies of Scale (ES) exist when increasing the volume of production decreases the Average Cost (AC) per unit produced.

The larger the scale of production, the cheaper each unit becomes.

What are Internal Economies of Scale?

Internal ES exist when a single firm's AC falls as it increases its own output.

They are internal to the firm and depend on the size of the firm.

They arise from fixed costs: C = F + cX → AC = F/X + c.

As X rises, the fixed cost is spread over more units and AC falls.

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