BUS 3000 Lecture Notes - Competitive Equilibrium, Cogeneration, Perfect Competition

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Recall that all factors, particularly capital, are variable in the long-run. Entry into or exit from the industry by firms of the same size as existing firms. We analyze the effect of changes in the size of individual firm capital through the concept of economies of scale. Economies of scale (increasing returns to scale) occur when a % increase in all factor inputs causes a greater % increase in output. Suppose that 5 units of labour and 3 units of capital produce 100 units of output but that 10 units of labour and 6 units of capital produce 250 units of output. => 100% increase in factor inputs produces a 150% increase in output. Why does the concept of economies of scale not contradict eventually diminishing. Definition: diseconomies of scale (decreasing returns to scale) occurs when a % increase in all factors causes a smaller % increase in output.

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