Question

1.Explain what is meant by economies of scale and economies of scope.

2. Give two examples of what would cause the short-run average total cost to shift up. Give two examples of what would cause the short-run average total cost to shift down. Draw both scenarios.

Answer 1

Economies of Scale for a firm is when it reduces the average total cost by increasing the scale of production. Since by the increase in the quantity of production up to a certain limit the average fixed costs fall.

Economies of Scope for a firm is when the firm reduces its average total cost by increasing the number of different types of goods it produces. Here the company shall produce a wide range of complementary products

Short-run average total cost shifts up

1. Increase in Average fixed costs - An increase in the total fixed costs shall contribute to the increase in the total cost

2. Increase in Average variable costs - An increase in the variable costs such as the Labor costs might result in the increase in the average total costs

Short-run average total cost shifts down

1. Technological Change - Any technological advancement shall enable the firm to produce more number of goods with same resources and time, thus bringing the

2. Increase in the size of the plant - An increase in the size of the plant shall increase the ease of production and thus the average cost falls down.