Chapter 2 textbook ( 4th edition)

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University of Toronto Scarborough
Economics for Management Studies
Jack Parkinson

ECMC40 Chapter 2 Economies of scale & scope: exist whenever large-scale production has a cost advantage over small processes. However,, they are not always available. Ie landscaping & tailoring dont have substantial scale economies. affect the size of firms, structure of markets, they are fundamental to diversification & merger strategies. affect pricing, entryexit, & the ability of the firm to secure a long tern sustainable advantage. Economies of scale: exists when AC declines as output increases. exists if the firm achieves unit cost savings as it increases the production of a good or sevice Which implies that the MC of the last unit produced is < Ac. ( MCAC , AC increases as q increases. AC curve: shows the relationship between AC and q. its a U curve. AC decline over low levels of output & rise over higher levels of output. A firms AC may decline initially as it spreads FC over increasing output. FC are insensitive to volume they should be expended regardless of the total output. If U shaped then small & large firms would have higher costs than medium sized firms. When AC are L shaped, AC decline up to the MES of production. All firms operating at or beyond MES have similar AC. Firms producing beyond MES can avoid diseconomies of scale by increasing their productive capacity. Economies of scope: exist if the firm achieves savings as it increases the variety of goods and services it produces. Economies of scale Economies of scope - usually defined in terms of Usually defined in terms of the relative declining AC functions total cost of producing a variety of goods & services together in one firm vs separately in 2 or more firms. Where do scale economies come from? 1) Indivisibilities & spreading of FC: indivisibility means that an input cannot be scaled down below a certain minimum size even when the level of output is very small.
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