Cambridge International as and a level Economics Ebook

economies of scale
 
and 
diseconomies of scale
.
Economies of scale: 
the benefits gained from falling long-
run average costs as the scale of output increases.
Diseconomies of scale: 
where long-run average costs 
increase as the scale of output increases.
KEY TERMS
154
Cambridge International A Level Economics

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Economies of scale
Economies of scale occur when average costs decrease 
as the fi rm increases its output by increasing its size or 
scale of operations. Th
ey can therefore only accrue to a 
fi rm in the long run. Internal economies of scale are the 
benefi ts that accrue to a fi rm as a result of its decision to 
Cost
Output
MC
ATC
Optimum
output (MC = ATC)
Diminishing returns
reflected in rising
unit costs
Increasing returns –
fixed factors used
more efficiently 
Costs
Output
MC
A
Diseconomies
of scale
Minimum
efficient
scale
A – B = Increasing returns
to scale or economies
of scale
SATC
MC
SATC
MC
SATC
LRAC
B
C
1
0
1
(b) Costs in the long run
(a) Costs in the short run
Figure 7.10 
A firm’s costs in the short run and in the long run
Figure 7.11 
LRAC envelope curve
Costs
Output
0
SRAC
1
SRAC
2
SRAC
3
SRAC
4
SRAC
5
LRAC
produce on a larger scale. Th
ey occur because the fi rm’s 
output is rising proportionally faster than the inputs, 
hence the fi rm is getting increasing returns to scale. If 
the increase in output is proportional to the increase in 
inputs, the fi rm will get constant returns to scale and 
the 
LRAC
will be horizontal. If the output is less than 
proportional, the fi rm will see diminishing returns to 
scale or diseconomies of scale. Th
ese are represented 
on 
Figures 7.10
 and 
7.11
 by points on the LRAC curve 
beyond the minimum point.
Th
e principal advantage for a fi rm benefi ting from 
economies of scale is a reduction in the cost per unit 
produced, i.e., a fall in the ATC. Th
e possible benefi ts