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Economies of Scale/Scope, Learning Curve

economies/diseconomies of scale  

  • input proportions change >> expansion path no longer a straight line
  • firm can double output for less than twice the cost >> economies of scale
  • firm needs more than twice the cost to double output >> diseconomies of scale
  • EC (cost-output elasticity) = MC/AC
    • EC < 1 >> economy of scale
    • EC > 1 >> diseconomies of scale
    • EC = 1 >> neither economies or diseconomies of scale

economies/diseconomies of scope  

  • joint output of single firm is greater than output by 2 separate firms >> economies of scope
  • joint output of single firm is less than output by 2 separate firms >> diseconomies of scope
    • if production of 1 product conflicted w/ production of 2nd when both produced together jointly
  • SC = [C(Q1) + C(Q2) - C(Q1,Q2)] / C(Q1,Q2)
    • measures degree of economies of scope
    • SC > 0 >> economies of scope
    • SC < 0 >> diseconomies of scope

learning curve - long term introduces new information to increase efficiency  

  • workers/managers can become better adapted to their jobs, more experienced, more efficient >> long-term average cost can decrease
  • learning curve describes relation between output and amount of inputs needed for each output
  • L = A + BN-b
    • N = units of output produced
    • L = labor input per output unit
    • A, B, b constants (where A, B positive and 0 < b < 1)
    • larger b >> more important learning effect
  • economies of scale moves along the average cost curve, learning curve shifts the average cost curve downwards

Subject X2: 

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