Economies of Scale

Internal Economies of Scale

A fall in long-run average total costs as the output of a firm increases. 

As the diagram above shows, that the LRAC at first faces increasing returns thus gaining economies of scale to the point in which the LRATC reaches the point of MES (minimum efficient scale – the lowest output associated with minimum LRATC). Constant returns to scale all represent an optimum output (point of lowest point of ATC).

Examples of Internal Economies

Technical Economies

• Indivisibilities – small firms might need equipment bar unable to make maximum use of it e.g. a cement mixer costs the same whether it is used for three or five days (apart from depreciation) but a bigger firm will be able to use it for five days thus a fall in the average cost per…