Economies of Scale

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Economies of Scale

Economies of Scale: Occur for a firm when an increase in the scale of production leads to production at lower long - run average cost

Internal Economies of Scale: expansion of the firm itself, lower long run average cost, efficiencies from larger scale production

External Economies of Scale: expansion of the industry, benefits most/all firms, agglomeration economies are important, helps to explain the rapid growth of many cities

Diseconomies of Scale: increases in the unit cost of supply in the long run. This means a business has moved beyond their optimum size, businesses see suffering from productive inefficiency, higher unit costs will reduce total profits, have to charge higher prices, lost competitiveness could lead to declining market share and a fall in their share price

Short Run: At least one factor input is fixed (factors of production)

Long Run: All factors of production are variable (able to expand)

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