<< Chapter < Page Chapter >> Page >

[link] illustrates the idea of economies of scale, showing the average cost of producing an alarm clock falling as the quantity of output rises. For a small-sized factory like S, with an output level of 1,000, the average cost of production is $12 per alarm clock. For a medium-sized factory like M, with an output level of 2,000, the average cost of production falls to $8 per alarm clock. For a large factory like L, with an output of 5,000, the average cost of production declines still further to $4 per alarm clock.

Economies of scale

The graph shows a downward sloping line that represents how large-scale production leads to a decrease in average costs.
A small factory like S produces 1,000 alarm clocks at an average cost of $12 per clock. A medium factory like M produces 2,000 alarm clocks at a cost of $8 per clock. A large factory like L produces 5,000 alarm clocks at a cost of $4 per clock. Economies of scale exist because the larger scale of production leads to lower average costs.

The average cost curve in [link] may appear similar to the average cost curves presented earlier in this chapter, although it is downward-sloping rather than U-shaped. But there is one major difference. The economies of scale curve is a long-run average cost curve, because it allows all factors of production to change. The short-run average cost curves presented earlier in this chapter assumed the existence of fixed costs, and only variable costs were allowed to change.

One prominent example of economies of scale occurs in the chemical industry. Chemical plants have a lot of pipes. The cost of the materials for producing a pipe is related to the circumference of the pipe and its length. However, the volume of chemicals that can flow through a pipe is determined by the cross-section area of the pipe. The calculations in [link] show that a pipe which uses twice as much material to make (as shown by the circumference of the pipe doubling) can actually carry four times the volume of chemicals because the cross-section area of the pipe rises by a factor of four (as shown in the Area column).

Comparing pipes: economies of scale in the chemical industry
Circumference ( 2 π r ) Area ( π r 2 )
4-inch pipe 12.5 inches 12.5 square inches
8-inch pipe 25.1 inches 50.2 square inches
16-inch pipe 50.2 inches 201.1 square inches

A doubling of the cost of producing the pipe allows the chemical firm to process four times as much material. This pattern is a major reason for economies of scale in chemical production, which uses a large quantity of pipes. Of course, economies of scale in a chemical plant are more complex than this simple calculation suggests. But the chemical engineers who design these plants have long used what they call the “six-tenths rule,” a rule of thumb which holds that increasing the quantity produced in a chemical plant by a certain percentage will increase total cost by only six-tenths as much.

Shapes of long-run average cost curves

While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve. Thus, the long-run average cost (LRAC) curve    is actually based on a group of short-run average cost (SRAC) curves , each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output. [link] shows how the long-run average cost curve is built from a group of short-run average cost curves. Five short-run-average cost curves appear on the diagram. Each SRAC curve represents a different level of fixed costs. For example, you can imagine SRAC 1 as a small factory, SRAC 2 as a medium factory, SRAC 3 as a large factory, and SRAC 4 and SRAC 5 as very large and ultra-large. Although this diagram shows only five SRAC curves, presumably there are an infinite number of other SRAC curves between the ones that are shown. This family of short-run average cost curves can be thought of as representing different choices for a firm that is planning its level of investment in fixed cost physical capital—knowing that different choices about capital investment in the present will cause it to end up with different short-run average cost curves in the future.

Questions & Answers

please l need past question about economics
Prosper Reply
ok let me know some of the questions please.
Effah
ok am not wit some if den nw buh by tommorow I shall get Dem
adepojurafiu
Hi guys can I get Adam Smith's WEALTH OF NATIONS fo sale?
Ukpen
Wat d meaning of management
igwe Reply
disaster management cycle
Gogul Reply
cooperate social responsibility
igwe
Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI
difference between microeconomics and macroeconomic
Ugyen Reply
microeconomics is the study of individual units, firm and government while macroeconomics is the study of the economic aggregates.
okhiria
The classical theory of full employment
Lovely
what is monopoli power
Adzaho Reply
the situation that prevails when economic forces balance so that economic variables neither increase nor decrease
Bombey
what is equilibrium
Kabir
what are the important of economic to accounting students with references
salihu Reply
Economics is important because it helps people understand how a variety of factors work with and against each other to control how resources such as labor and capital get used, and how inflation, supply, demand, interest rates and other factors determine how much you pay for goods and services.
Muhammad
explain the steps taken by the government in developing rural market?
Azeem Reply
contribution of Adam smith in economics
abel Reply
I will join
Dexter
I will join
Patrick
Hey
Fatima
Hey
Amir
Hello
AS
hey
Umarou
I love this book and i need extra Economic book
Amir
Hey
Amir
what's happening here
AS
I love this book and i need extra Economic book
Amir
what is the meaning of function in economics
Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Afran
what is production
Humaira
Okay what is land mobile and land unmobile
scor
And what are the resources in land
scor
the proces of using the services of labor and equipmnt together with other in puts to make goods and services availble
Bombey
Okay what is land mobile and land unmobile
scor
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
hey
Soumya
hi
Mitiku
how are you?
Mitiku
can you tell how can i economics honurs(BSC) in reputed college?
Soumya
through hard study and performing well than expected from you
Mitiku
what should i prepare for it?
Soumya
prepare first, in psychologically as well as potentially to sacrifice what's expected from you, when I say this I mean that you have to be ready, for every thing and to accept failure as a good and you need to change them to potential for achievement of ur goals
Mitiku
parna kya hai behencho?
Soumya
Hallo
Rabindranath
Hello, dear what's up?
Mitiku
cool
Momoh
good morning
Isaac
pls, is anyone here from Ghana?
Isaac
Hw s every one please
Afran
Ys please I'm in Ghana
Afran
Hello
OLANIYI
pls anyone from Nigeria
OLANIYI
am a new candidate here, can someone put me 2ru
OLANIYI
hello
OLANIYI
Pls economic A level exam tomorrow pls help me
akinwale
am from Ghana
Jacob
Pls economic A level exam tomorrow pls help me
akinwale
Hi
Dev
bol Diya discuss ab krega v
Dev
hello Mr. Rabindranath
Dev
what do you want Dimlare
Dev
yes tell me your desire to have it
Dev
to have what?
OLANIYI
Good luck
JOSEPH
I want to know about economic A level tomorrow pls help
Lerato
okay
Umarou
okay
Umarou
hi
Humaira
hi
Liaqat
what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
Avuwada
What is autarky in Economics.
Avuwada
what is choice
Tia Reply
So how is the perfect competition different from others
Rev Reply
what is choice
Tia
please what type of commodity is 1.Beaf 2.Suagr 3.Bread
Alfred Reply
1
Naziru
2
Mayor

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask