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Firm's Cost of Production and Output Increase

Question

Discuss whether the average cost of production always decreases when a firm increases the total output that it produces.

Category:

Firm Behavior and Strategies

Frequently asked question

Preview Answer

I. 🍃Introduction
- Definition of economies of scale
- Importance of understanding economies of scale

II. Reasons why a firm may experience economies of scale (up to ➡️5 marks)
- Economies of scale due to total cost rising by less than total output
- Buying/purchasing economies of scale
- Technical economies of scale
- Managerial economies of scale
- Financial economies of scale
- R&D economies of scale
- External economies of scale due to industry growth

III. Reasons why a firm may not experience economies of scale (up to ➡️5 marks)
- Diseconomies of scale due to total cost rising by more than total output
- Diseconomies of scale making the firm slower to respond to changing market conditions
- Communication problems
- Poor industrial relations
- External diseconomies of scale

IV. Average cost diagram (up to ➡️2 marks)
- Correctly labelled diagram showing economies and diseconomies of scale

V. 👉Conclusion
- Summary of key points
- Importance of considering economies of scale in business decisions.

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