Analyze, with the Aid of a Diagram, Whether There Is Link Between Diminishing Returns and Economies of Scale.

1151 Words May 19th, 2013 5 Pages
Analyze, with the aid of a diagram, whether there is link between diminishing returns and economies of scale. (12)

Variable factor is an input whose quantity can be changed in the time period consideration. Fixed factor is a production input factor that cannot change quantities during a certain time period. Short run is where at least one factor is fixed, usually capital. Long run is where all factors are variable

Marginal product (MP) is the extra output from hiring an additional unit of the variable factor. The MP increase first then decrease. Imagine the variable factor is labour. If the extra worker makes more units than the employees were making on average before he or she joined, the average output per worker will rise, e.g.
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The long-run average cost curve is the combination of infinite most efficient point on the short-run curves.

The long-run average cost curve is also ‘U’ shaped as the short-run average cost curve and the part of falling is called economies of scale, i.e. economies of scale is the benefits derived from falling long run average costs as the scale of output expands. The economies of scale combined of two parts: internal economies of scale and external economies of scale. Internal economies of scale related to the change in AC as it increases its output. External economies of scale occurs when the cost per unit at every level of output is reduced because of factors within the industry but outside of the firm.

Internal economies of scale include:
Technical economies is the advantages gained diretly in the production process, e.g. Imagine a car production line only produce two cars a week. By using the line to its capacity and making far more cars, the cost of the equipment can be spread over more units, lowering the cost per unit.

Purchasing economies, i.e. bulk buying, occurs when larger firms tend to buy larger quantities of input and so are in a stronger position to negotiate.

Managerial economies is caused by the number of managers needed by a firm does not normally increase at the same rate as output, e.g. if the firms output doubles, this does not mean it

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