Economics, 3rd Edition

SELF TEST 

If Airbus produces 9 jets per month, its long-run total cost is 

€9.0 million per month. If it 

produces 10 jets per month, its long-run total cost is 

€9.5 million per month. Does Airbus exhibit economies or 

diseconomies of scale?

Diseconomies of scale can arise because of coordination and communication problems that are inher-

ent in any large organization. The bigger the business organization, the more stretched the management 

team becomes, the more likely it is that communication and decision making become dysfunctional and 

the less effective the managers become at keeping costs down.

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CHAPTER 6  BACKGROUND TO SUPPLY: FIRMS IN COMPETITIVE MARKETS  151

As we did when looking at a firm’s costs, consider these two questions:

 

●

How much revenue does the farm receive for the typical litre of milk?

 

●

How much additional revenue does the farm receive if it increases production of milk by 1 litre?

The last two columns in Table 6.4 answer these questions.

The fourth column in the table shows 

average revenue

, which is total revenue (from the third column) 

divided by the amount of output (from the first column).

AR =

TR

Q

Average revenue tells us how much revenue a firm receives for the typical unit sold. In Table 6.4, you 

can see that average revenue equals 

€6, the price of a litre of milk. This illustrates a general lesson that 

applies not only to competitive firms but to other firms as well. Total revenue is the price times the quant-

ity  (P

× Q), and average revenue is total revenue (P × Q) divided by the quantity (Q). Therefore, for all 

firms, average revenue equals the price of the good.