10.9 Economies and Diseconomies of scale

The major difference between short run and long run is that there is no diminishing return in the long run. In short run, diminishing return occurs because the fixed factor cannot be expand but in the long run, firm can expand the size of firm as labour expand since there is no fixed factor.

Scale refers to the amount of investment in fixed factors of production. Costs of production are smaller in large firms than small firms and this is due to economics of large scale production.

The term economies refers to the advantages and when these economies are over-exploited the results may disadvantages i.e. diseconomies.

Economies of scale

This refers to a situation in which an increased in quantity produced decreases the long run average cost of production. Economies of scale have to do with cost saving associated with spreading of the cost of indivisible input and output specialization. Long run Average Cost (LAC) is negative sloped during economies of scale.

10.9 Economies and Diseconomies of scale

Diseconomies of scale

It refers to the situation in which an increase in output lead to an increase in the long run average cost of production. LAC is positive sloped and it occurs due to (1) increase in the cost of input (2) management problem which may arise from various angles (managerial inefficiency, supervision, slow decision making etc.)