Economies of Scale

Firms achieve internal economies of scale when they are able to change magnitude average costs per building block of toil as the sizing of their output grows. Economies of scale are known to be parade when as output rises, long-run average cost falls. assuming that there is enough demand for the output produced, the degenerate brook increase its all overall profitability by continuing to hold out the business while lowering the per unit production costs. The angle of the LRAC curve slopes downward when economies of scale are present and thereof have been achieved by the firm.

Figure 1.0; Internal economies and diseconomies of scale

In figure 1.0, output from OX has increased giving rise to lower per unit production costs. The firm is said to experience internal economies of scale over this range of output.

There are a number of possible sources as to how firms can achieve internal economies. Increased specialization of do work resulting from a larger plant with a larger manpower allows for greater division of labour. The resulting productivity gains mean lower per unit costs.

As firms expand, it becomes possible for the firms to increase their use of capital by employing to a greater extent expensive and more than efficient machinery.



However, it may only be profitable for these firms to use this kind of capital equipment if they produce a very large volume of output.

By purchasing raw materials in bulk quantities, a large firm can a good deal lower the cost of its inputs.

As a result of a firms greater capacity to develop and produce by-products, a larger firm may be able to make a more economical use of its inputs and may not have glut materials that would otherwise go to waste or be change off at a discounted price. Small firms are marvelous to have the potential to cut waste...

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