1.4.5 Economies and Diseconomies of Scale

Economies of Scale

A fall in the long-run average cost (LRAC) curve due to an increase in output of a firm.

Diseconomies of Scale

A rise in the long-run average cost (LRAC) curve due to growth of a firm.

Internal Economies of Scale

Cost advantages that a firm can achieve through its own growth.

External Economies of Scale

Cost benefits that accrue to all firms in an industry as the industry grows.

Minimum Efficient Scale (MES)

The level of production at which long-run average costs are minimized.

LRAC Curve

Long-Run Average Cost Curve, showing average costs as output changes.

Technical Economies of Scale

Cost savings achieved through more efficient production techniques as output increases.

Managerial Economies of Scale

Cost efficiencies derived from employing specialists in management as a firm grows.

Marketing Economies of Scale

Cost reductions realized through bulk marketing efforts.

Purchasing Economies of Scale

Cost savings obtained by buying inputs in larger quantities.

Financial Economies of Scale

Lower costs of capital financing owing to larger scale operations.

Diminishing Returns

The principle that as more of a variable factor is added to a fixed factor, the additional output will eventually decrease.

Coordination Diseconomies of Scale

Increased administrative costs and inefficiencies due to larger organizational structures.

Communication Diseconomies of Scale

Higher costs of communication and potential miscommunication as firms grow larger.

Motivation Diseconomies of Scale

Reduced worker motivation and productivity due to over-specialization and feeling of remoteness in large organizations.

L-shaped LRAC Curve

A long-run average cost curve that decreases rapidly at first and then flattens out.

U-shaped LRAC Curve

A long-run average cost curve that initially decreases, reaches a minimum point, and then increases.

Natural Monopoly

A market condition where a single firm can supply the entire market at lower costs than multiple firms.

Perfect Competition

A market structure where numerous small firms compete against each other, leading to no single firm controlling prices.

Monopolistic Competition

A market structure where many firms sell similar but not identical products, leading to some market power.

Oligopoly

A market structure characterized by a few large firms that dominate the market.

Returns to Scale

The rate at which output increases as inputs are increased in production.

Increasing Returns to Scale

A situation where output increases by a larger proportion than the increase in inputs.

Constant Returns to Scale

A situation where output increases proportionately with an increase in inputs.

Decreasing Returns to Scale

A situation where output increases by a smaller proportion than the increase in inputs.

Barriers to Entry

Obstacles that make it difficult for new firms to enter a market.

Infrastructure Development

Improvements in physical structures that facilitate the growth of industries.

Skilled Labor Force

A workforce that has specialized skills and training beneficial for industries.

Trade Discount

A reduction in the listed price of goods or services, typically given for bulk purchases.

Market Structure

The organizational characteristics of a market, influencing competition and pricing.

Long-Run Equilibrium

A situation where firms in the industry make zero economic profit in the long run.

Cost Curves

Graphs that show the relationship between the quantity of output produced and the costs incurred.

Competitive Advantage

A condition that enables a company to perform better than its competitors.

Market Demand

The total quantity of a good or service that all consumers in a market are willing to purchase at various prices.

Cost Efficiency

A measure of how much output is produced relative to input costs.

Production Function

The relationship between the quantity of inputs used in production and the quantity of output from production.

Long-Run Cost Analysis

Examination of production costs over a period where all inputs can be varied.

Short-Run Cost Analysis

Examination of production costs when at least one input is fixed.

Economics of Scale Analysis

The study of how a firm's costs change with varying levels of output.