The rising average cost of production implies that

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The rising average cost of production implies that marginal cost is average cost. In the presence of fixed costs, increasing marginal cost gives you a U-shaped average cost curve. Economies of Scale The law of diminishing marginal returns is primarily a short-run phenomenon arising from the fixity of at least one factor of production, like capital or plant size. In the long run, however, you can
increase the size of the plant, hire more workers, buy more machines, and remove production bottlenecks. In other words, your “fixed” costs become “variable” in the long run. Definition : SR “fixity” vs. LR “flexibility” Definition : If double all inputs, if Q: Doubles you have constant returns to scale Less than doubles, you have decreasing returns to scale More than doubles, you have increasing returns to scale Note that with economies of scale, average costs are falling as output increases Economies of Scale are cost advantages reaped by companies when production becomes efficient . Companies can achieve economies of scale by increasing production and lowering costs . This happens because costs are spread over a larger number of goods . Costs can be both fixed and variable . The size of the business generally matters when it comes to economies of scale. The larger the business is, the more the cost savings. Economies of scale can be both internal and external . Internal economies of scale are based on management decisions, while external ones have to do with outside factors. Most consumers do not understand why a smaller business charges more for a similar product sold by a larger company. That is because the cost per unit depends on how much the company produces . Larger companies are able to produce more by spreading the cost of production over a larger amount of goods. An industry may also be able to dictate the cost of a product if there are number of different companies producing similar goods within the industry. There are several reasons why economies of scale give rise to lower per-unit costs. 1. Specialization of labor and more integrated technology boost production volumes. 2. Lower per-unit costs can come from bulk orders from supplier, larger advertising buys, or lower cost of capital. 3. Spreading internal function costs across more units produced and sold helps to reduce cost. Internal functions include accounting, information technology, and marketing. The first two reasons are also considered operational efficiencies and synergies. The second two reasons are cited as benefits of merger and acquisitions. Note: * a company can create a diseconomy of scale when it becomes too large and chases an economy of scale. *learning by doing is a further source of economies of scale There are two different types of economies of scale.

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