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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.
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 ...
Economies of scale refers to the cost advantage arise from increasing amount of production. Mathematically, it is a situation in which the firm can double its output for less than doubling the cost, which brings cost advantages. Usually, economies of scale can be represented in connection with a cost-production elasticity, Ec. [3]
A common and specific example is the supply-and-demand graph shown at right. This graph shows supply and demand as opposing curves, and the intersection between those curves determines the equilibrium price. An alteration of either supply or demand is shown by displacing the curve to either the left (a decrease in quantity demanded or supplied ...
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.
In economics, the concept of returns to scale arises in the context of a firm's production function.It explains the long-run linkage of increase in output (production) relative to associated increases in the inputs (factors of production).
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If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown [1] [2] [3] that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long-run average cost ...