Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 13 - Part V - The Costs of Production - Questions for Review - Page 275: 8

Answer

It is the shape of the long run average total cost curve that will tell us about the economies or diseconomies of scale of a firm. Economies of scale occur when the long-run average total cost falls as the quantity of output increases. It can arise because high production levels permit for specialisation among workers. Diseconomies of scale occur when the long-run average total costs rise as the quantity of output increases. It can arise due to coordination problems (that are a characteristic of any large organisation).

Work Step by Step

We can observe both economies and diseconomies of scale on the same long run average total cost curve, which is U-shaped. At low levels of production, the firm benefits from the increased size as it can take advantage of greater specialisation. At high levels of production, the firm has already taken advantage of specialisation and thus coordination problems now become more severe.
Update this answer!

You can help us out by revising, improving and updating this answer.

Update this answer

After you claim an answer you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.