Question

Discuss: Efficiency, Economies of Scale, and the Experience Curve

Answer 1

Answer: Efficiency, economies of scale, and experience all together play an important role in the success of a firm or a business .They are instrumental in lowering the costs involved in the production ensuring maximum possible profit. By efficiency we mean resources to be put in use in a best possible way to minimize the costs and to and to increase profits. Economic efficiency is categorized into two categories. (i) Allocativeefficiency- This efficiency is achieved when a firm produces output with the least cost combination of inputs. (ii) Productive efficiency- It is achieved when output price in market equals to the minimum of long run average cost (P= minimum LAC). Economies of scale exists, when with the increase in the output firms average cost (per unit costs) decreases. Reasons for economies of scale may be specialization of labour and machinery. Economies of scale restricts new firms to enter the market, because existing firms plant sizes and output are larger and average cost is smaller. Experience curve (not learning curve) expresses the inverse relationship between a firm's experience and average costs of production. Experience curve slopes downward showing that when a firm's experience grows its per unit costs (average cost decreases).