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Economics explained


Firm's cost structure

Marginal cost and average costs

Marginal cost and average costs

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Economies of scale

Spreading fixed costs over a larger amount of output is one of the most important sources of economies of scale, the tendency for the cost per unit to fall as output rises.

For example, a full lorry does not cost much more to run than a half-full one, but the full one's costs are spread across twice the amount of goods. Management costs, and those of advertising, are similarly spread over a larger amount of output.

Diseconomies of scale

Diseconomies of scale, in other words rising unit costs, also apply after a certain point.

For example, there is the tendency, above a certain size of company, for lean and efficient management to be replaced by layers of bureaucracy.

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