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Economies of scale is related to and can easily be confused with the theoretical economic notion of returns to scale. Where economies of scale refer to a firm's costs, returns to scale describe the relationship between inputs and outputs in a long-run (all inputs variable) production function.
In microeconomics, diseconomies of scale are the cost disadvantages that economic actors accrue due to an increase in organizational size or in output, resulting in production of goods and services at increased per-unit costs. The concept of diseconomies of scale is the opposite of economies of scale.
Economic models can be such powerful tools in understanding some economic relationships that it is easy to ignore their limitations. One tangible example where the limits of economic models allegedly collided with reality, but were nevertheless accepted as "evidence" in public policy debates, involved models to simulate the effects of NAFTA ...
If only diseconomies of scale existed, then the long-run average cost-minimizing firm size would be one worker, producing the minimal possible level of output. However, economies of scale also apply, which state that large firms can have lower per-unit costs due to buying at bulk discounts (components, insurance, real estate, advertising, etc.) and can also limit competition by buying out ...
Such countries did benefit from economies of scale and so had large plantation agriculture with slave labor, large income and class inequalities, and limited voting rights. This difference in political power led to little spending on the establishment of institutions such as public schools and slowed down their progress.
If Y is a separable production set with a production value function f p, then (positive) economies of scale are present if f p (λx) > λf p (x) for all λ > 1 and f p (λx) < λf p (x) for all λ < 1. The opposite condition may be referred to as negative economies (or diseconomies) of scale.
Economic variables are not readily isolated for experimental testing, but Edward Leamer argues that there is no essential difference between econometric analysis and randomized trials or controlled trials provided the use of statistical techniques reduces the specification bias, the effects of collinearity between the variables, to the same ...
In mainstream microeconomics, the returns to scale faced by a firm are purely technologically imposed and are not influenced by economic decisions or by market conditions (i.e., conclusions about returns to scale are derived from the specific mathematical structure of the production function in isolation). As production scales up, companies can ...