ECONOMIES+OF+SCALE.ppt - Department of Economics and Business DIC Economies and Diseconomies of Scale Economies and Diseconomies of Scale Economics of

ECONOMIES+OF+SCALE.ppt - Department of Economics and...

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Economies and Diseconomies of Scale Economies and Diseconomies of Scale Department of Economics and Business DIC
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Economies and Diseconomies of Scale Economics of Large Scale Production Why are businesses such as Cunard building a new generation of super-cruisers capable of carrying over 3,000 passengers? Why can Tesco Lotus sell food and other products at considerably lower prices than local shops? Why is the most car factories so large? Why is Coca Cola able to spend huge sums every year on high profile advertising around the globe? What are the possible economies of scale available to the main international manufacturers of mobile phones?
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Economies and Diseconomies of Scale Long-run returns to scale A firm manufacturers casual sports clothing using variable inputs of labour and capital. The total output (shirts per day) that results from changing these inputs is shown in the table. What is the nature of the returns to scale?
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Economies and Diseconomies of Scale Returns to scale Increasing returns to scale when the % change in output > % change in inputs E.g. a 30% rise in factor inputs leads to a 50% rise in output Decreasing returns to scale when the % change in output < % change in inputs E.g when a 60% rise in factor inputs raises output by only 20% Constant returns to scale when the % change in output = % change in inputs E.g when a 10% increase in all factor inputs leads to a 10% rise in total output
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Economies and Diseconomies of Scale Scale Economies in the Long Run Where the expansion of a firm leads to a reduction in long-run average total costs Occurs when a firm achieves increasing returns to scale Extent to which economies of scale can be exploited in different industries will vary
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  • Summer '13
  • Dr. Amer
  • Economics

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