Goods can be produced at a lower cost per good as the quantity produced increases as a result of efficient specialization of machinery and labor for large-scale factory operations. Average fixed costs will decline as costs such as advertising can be spread across more and more units.
Reasons:
- Mass production
- specialization of factors of production
- Learning by doing
Diseconomies of Scale
Occur when per unit costs go up as output is increased as a result of bureaucratic inefficiencies – more attention may be given to administrative rules as opposed to innovation. Worker motivation is also more difficult as the number of employees increases.
Reasons:
- Coordination inefficiencies
- Increasing difficulties in communications
- Increased principal-agent problems
When economies of scale occur, the long-run average total cost (LRAC) curve will be declining; with diseconomies of scale, the LRAC curve will be rising.
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