Edexcel A Level Economics A:复习笔记3.3.3 Economies & Diseconomies of Scale

• As a firm increases its scale of output in the long-run, its long-run average total costs (LRATC) will initially decrease due to the benefits it receives
  • These benefits are called economies of scale
    • During this period the firm is enjoying increasing returns to scale
• As a firm continues increasing its scale of output in the long-run, its LRATC will start to increase at some point
  • The reasons for the increase in the LRATC are called diseconomies of scale
    • During this period the firm is facing decreasing returns to scale

Types Of Economies & Diseconomies of Scale

• The minimum efficient scale is the lowest cost point on a long-run average total cost (LRATC) curve
  • It represents the lowest possible cost per unit that a firm in the industry can achieve in the long run.

As a firm grows, economies of scale help a firm to reach its minimum efficient scale before diseconomies raise the cost/unit again

Diagram analysis

• Each subsequent short-run average cost (SRAC) curve represents growth & an increase in size
  • Output increases with each period of growth
• Initially firms experience increasing returns to scale as a result of the economies of scale
• At a certain level of output, the firm will reach the minimum efficient scale where it experiences constant returns to scale
• If it continues to grow beyond that level of output the firm will experience decreasing returns to scale as diseconomies of scale occur

• All of the economies of scale explained above are internal economies of scale
• External economies of scale occur when there is an increase in the size of the industry in which the firm operates
  • The firm is able to benefit from lower LRATC generated by factors outside of the firm

Sources Of External Economies Of Scale