Economics, 3rd Edition

Economies and Diseconomies of Scale

When a firm increases the scale of production there are three outcomes that can occur as highlighted in 

Figure 6.5. Assume our pizza factory owner currently employs 50 workers and 10 machines in a factory 

with a floor space of 1,000m

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 and currently produces 2,000 pizzas per day. The total cost of producing 

these 2,000 pizzas per day is 

€4,000. The average cost of each pizza is, therefore, €4,000/2,000 = €2 each.

Paolo doubles the input of all the factors of production and as a result now employs 100 workers, 

20 machines and has 2,000m

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 of capacity. The cost of expanding the scale of production is clearly going 

to be higher but what happens to the average cost of production? This depends on how far total cost 

increases and what happens to output. If the total cost of production also doubled to 

€8,000 and output 

also doubled to 4,000, the average cost of each pizza would still be 

€2. The firm is said to be experiencing