Management And Accounting Web

What are Economies of Scale?

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Economics Related Main Page

Citation: Martin, J. R. Not dated. What are economies of scale? Management And Accounting Web. http://maaw.info/EconomiesOfScaleNote.htm

The graphic illustration below (based on Figure 11-12) shows the short-run average cost curve for a specific size plant based on increasing then decreasing productivity. The average cost decreases as productivity increases, then increases after the point of diminishing returns is reached. See Chapter 11 for more on these relationships. An important point to grasp is that the short run average cost curve is U-shaped because of the phenomenon known as diminishing returns.

Short-Run Average Cost Curve for a Single Plant Size

Economies of Scale versus Diminishing Returns

The concept of economies of scale is based on the long-run average cost (LRAC) curve as indicated in the graphic illustration below. The LRAC curve is derived from the short-run average cost (SRAC) curves represented by alternative plant sizes. The U-shaped function drawn tangent to the various short-run cost curves represents the long-run average cost curve and illustrates the concept of economies of scale. An important point to grasp is that the long-run average cost curve is U-shaped because of the phenomenon known as economies of scale.

Long Run Average Cost Curve - Economies of Large-Scale Production

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For a great deal more depth on this topic, see Thompson, A. A. Jr. 1973. Economics of the Firm: Theory and Practice. Prentice Hall. Chapter 8.

Related chapter:

Martin, J. R. Not dated. Chapter 11: Conventional Linear Cost-Volume-Profit Analysis. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter11.htm