Question

Given the following information, does this firm has economies of scale or diseconomies of scale. Explain why with reference to the values of ATC.

Small production unit . Large production uni

Q . FC VC       Q . FC . VC .

5 50 . 50 50 . 500 . 500

10 . 50 . 70 100 500 . 800

20 . 50 . 200 200 . 500 . 2500

Answer 1

Answer: This firm has both economies of scale.

A company attains economies of scale when it can save its cost by producing more quantity of output.

In the tables below,

The Total Cost is calculated by = Fixed Cost + Variable Cost. For example, for small production unit, Total Cost for 5 quantity = 50 + 50 = 100.

The Average Total Cost is calculated by = Total Cost/ Quantity produced. For example, for small production unit, Average Total Cost = 100/5 = 20.

Small Production Unit:

Quantity	Fixed Cost	Variable Cost	Total Cost	Average Total Cost
5	50	50	100	20
10	50	70	120	12
20	50	200	250	12.5

Here, we see that the Average Total Cost decreases when the quantity produced increases to 10 units for the small production unit. So, this firm has economies of scale till the 10th unit.

Large Production Unit:

Quantity	Fixed Cost	Variable Cost	Total Cost	Average Total Cost
50	500	500	1000	20
100	500	800	1300	13
200	500	2500	3000	15

Here, we see that the Average Total Cost decreases when the quantity produced increases to 100 units for the large production unit. So, this firm has economies of scale till the 100th unit.