15 G Describe how Economies of Scale and Diseconomies of scale affect costs

Question 1

Economies of Scale (-slope (price reduction through output) of LRATC U-curve; increasing returns to scale)

Answer 1

Labor specialization, Mass Production, More Efficient Equipment, Technology, Bargaining power for input prices

A firm operating in economies of scale can increase its competitiveness by expanding production and reducing costs.

Question 2

Diseconomies of Scale (+slope (price increases through output) of LRATC U-curve; decreasing returns to scale)

Answer 2

Bureaucracy leads in inefficiency, problems motivating a large work force, greater barriers to innovation and entrepreneurial activity.

A firm operating under diseconomies of scale will want to decrease output and move back toward the min efficient scale, where constant returns to scale reside as flat along the curve.