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101 Concepts for the Level I Exam

Concept 19: Economies and Diseconomies of Scale

Economies of scale: As output increases, the long-run cost per unit decreases. Factors contributing to economies of scale include:

  • Increase in output larger than increase in input
  • Specialization
  • More expensive but more efficient equipment
  • Lower waste and lower costs
  • Better use of market information
  • Volume discounts from suppliers

Diseconomies of scale: As output increases, the long-run cost per unit increases. Factors contributing to diseconomies of scale include:

  • Increases in output are less than increases in input
  • Company size becomes too large to manage efficiently
  • Duplication
  • Higher labor costs
  • Higher resource costs

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