Economies of Scale

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Definition: Economies of Scale

When the out of the firm rises, the average cost of producing that output will decline. This average cost will decline to a certain level and that may be because of: 

  •  Increased labour productivity because of learning curve effect and specialization
  • Effective production process because of flexibility  
  • Acquisition of inputs at a lower cost because of high bargaining power.

Therefore a situation where the output is doubled for less than a doubling of cost, it is termed as ‘ECONOMIES OF SCALE”. Here the marginal cost of production is lower for every additional unit produced.

 

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