Economies of Scale and Diseconomies of Scale

Economies of scale occur if, as the firm increases its output, cost per unit of production falls.

Diseconomies of scale occur if cost per unit rises as output increases.

Economies of scale can result from:

Increasing returns to scale.

Specialization economies.

Equipment and technology improvement.

Enhanced cost control and quality control.

More effective managerial decision making.

Bargaining power in input price.

Diseconomies of scale can result from:

Decreasing returns to scale.

Too large to be properly managed.

Overlapping and duplication products.

Higher prices because of supply constraints when buying inputs in large quantities.

The minimum point on the LRAC curve is referred to as the minimum efficient scale.

The minimum efficient scale is the optimal firm size under perfect competition over the long run.