Economies and diseconomies of scale
| English | 中文 | Pinyin |
|---|---|---|
| economies of scale/ɪˈkɒnəmiz ɒv skeɪl/ | 规模经济 | guī mó jīng jì |
| diseconomies of scale/ˌdɪsɪˈkɒnəmiz ɒv skeɪl/ | 规模不经济 | guī mó bù jīng jì |
A decision you can investigate
- A larger workshop negotiates a lower material price and uses a specialist manager. Yet expanding further causes delays because instructions pass through many layers.
- A larger scale can bring both savings and coordination costs.
Build the explanation
- Economies of scale 规模经济 reduce long-run average cost as scale grows. Internal economies arise within the firm: purchasing, marketing, technical, financial, managerial and risk-bearing advantages. External economies arise from the industry or area, such as skilled labour, suppliers and infrastructure.
- Diseconomies raise long-run average cost through bureaucracy, poor communication, weak control or distance between managers and workers. A long-run average cost curve shows how average cost changes across scales, not a firm’s short-run total-cost bill.
Work through the evidence
- Small-scale total cost is 1200 for 100 items: average cost = TC/Q = 12. At a larger scale total cost is 1800 for 200: average cost = 9. Total cost rises while average cost falls.
- At an even larger scale, delays raise total cost to 3300 for 300: average cost = 11. The 200-item scale has the lowest average cost among these three observations.
Which is an external economy of scale?
A local labour pool can benefit firms across the industry or area.
What is average cost at 300 items?
AC = TC/Q = 3300/300 = 11.
Higher total cost means economies of scale cannot have occurred.
Economies concern average cost; total cost can rise while average cost falls.
Test the limits
- External economies are not external benefits from consumption: the terms describe different concepts. A supplier cluster can reduce costs for several firms without being an ownership change.
- The lowest observed average cost is not proof of the exact minimum of a continuous LRAC curve. Higher total profit also does not establish economies of scale without average-cost evidence.
Which can produce diseconomies?
Coordination problems can raise average costs.
Apply and explain your answer
- Why is the change from 100 to 200 items an economy of scale despite higher total cost?
- Average cost falls from 12 to 9 per item as the production scale increases.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Use the terms precisely
- economies of scale: Falling long-run average cost as production scale increases.
- diseconomies of scale 规模不经济: Rising long-run average cost as production scale increases.
Small-scale total cost is 1200 for 100 items: average cost = TC/Q = 12. At a larger scale total cost is 1800 for 200: average cost = 9. Total cost rises while average cost falls. At an even larger scale, delays raise total cost to 3300 for 300: average cost = 11. The 200-item scale has the lowest average cost among these three observations.
External economies are not external benefits from consumption: the terms describe different concepts. A supplier cluster can reduce costs for several firms without being an ownership change. The lowest observed average cost is not proof of the exact minimum of a continuous LRAC curve. Higher total profit also does not establish economies of scale without average-cost evidence.
Economies of scale reduce long-run average cost as scale grows. Internal economies arise within the firm: purchasing, marketing, technical, financial, managerial and risk-bearing advantages. External economies arise from the industry or area, such as skilled labour, suppliers and infrastructure.