Question

Please describe and give examples for each of the following micro-economic terms:

1. Economies of scale (economies of mass production)
2. Economies of scope
3. Minimum efficient scale
4. Long run average cost
5. Constant returns to scale
6. Increasing returns to scale
7. Decreasing returns to scale
8. Average variable cost
9. Total fixed cost
10. Total variable cost
11. Marginal cost
12. Average Cost

Answer 1

Economies of scale or increasing returns to scale occurs when an increase in input costs results in more than proportional increase in output. For example, if a firm increases its labour costs by 10% the output increases by more than 10%. The increasing returns will be enjoyed by the firm till the optimum level is reached. A firm initially invests in huge fixed costs. For example, if a firm invests $100,000 to produce 1000 units, the fixed will be spread over the 1000 units. If the production increases to 2000 units, the fixed cost of $100,000 will be spread over the 2000 units with proportionate increase in variable costs. The firm will enjoy economies of scale as the cost of production decreases. This decrease will happen till an optimum level is reached. Beyond the optimum level of the firm, the per unit costs will tend to increase due to inefficiencies in production as the firm may get too large.

Economies of scope occurs when different products can be produced more efficiently together than apart. For example, If firm X manufactures  ready-to-wear clothes. To enjoy economies of scope, firm X may manufacture ready to wear senior clothes, children's clothes etc. This will help firm X to spread over its costs over a larger number of products and enjoy lower cost per unit.

Minimum efficient scale is the lowest point on long run average cost curve. It is the point at which a firm can produce the goods most efficiently and economically.

Long run average cost is the cost per unit of output when all costs variable.