(7) Economies of Scale

Steven E. Crane, Marquette University

Topic Category Cost

Abstract

This explores the concept of Economies of Scale, and how it relates to the shape of the Long Run Average Total Cost Curve (LRAC). It describes the notion of "scale" as a volume of output produced in a time period measure. It establishes the "Economies of Scale" are associated with a declining LRAC, and "Diseconomies of Scale" are associated with a rising LRAC. Next possible causes or sources of economies of scale are identified. Finally, the interplay between scale and overall market size is discussed as a way of explaining the number and size distribution of firms in a market.