Economics of Scale

  • Economies of scale occurs when increased output leads to lower long run average costs.

Diagram of Economics of Scale


Note Economies of Scale occurs upto Q2. After Q2 dis-economies of scale starts to occur

Basically as a firm expands it receives increasing returns to scale. To understand why economies of scale occur it is useful to think about large companies and how they benefit from their size.

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Cannibalise definition

To cannibalise your assets means that you create a new product which eat into sales of your old products. For example, suppose Microsoft have good sales for its X Box. If it introduced a new superior product, like the ‘X box mark 2’. Nobody would want to buy the old X Box. Therefore, sales of …

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