Economies

Apuntes

•Economies and diseconomies of scale Businesses that expand or increase their scale of operations can often become more efficient. "Scale of operations" refers to the size or volume of output. When a business increases its scale and becomes more efficient, it has achieved economies of scale. This term describes the reduction in average unit cost as the business grows. •Growth and evolution However, sometimes a larger business experiences inefficiencies. When this occurs, the business faces diseconomies of scale, which means an increase in average unit cost as size increases. Efficiency is measured by costs of production per unit. For a detailed explanation of different cost types, see Unit 5. For now, consider the formula: total cost = fixed cost + variable cost. Fixed costs remain unchanged regardless of production volume. For example, rent payments for a leased factory stay the same whether the business produces little or a lot. Variable costs change with production; for instance, a furniture manufacturer needs more raw materials as output increases. Further costs are known as average costs, unit costs, or average unit costs—total cost per unit. This can be calcula...