What is the difference between economies of scale and diminishing returns

What is the difference between law of diminishing returns to a factor and decreasing returns to scale? Answered by Abigail C. Need help with Economics?

One to one online tuition can be a great way to brush up on your Economics knowledge. Answered by Ryan H. Answered by Victoria L. Answered by Adam D. The marginal cost MC and average cost AC curves are U-shaped because of the law of diminishing returns.

The lowest point on the MC and the AVC curves shows the point where diminishing marginal retunrs and diminishing average returns set in respectively Total product is the output of a good or service generated by using factor inputs. Total product is maximized when marginal product is equal to 0. Marginal product is the extra output produced by adding one more additional unit of input e.

A business can vary all inputs and change the whole scale of production. This allows the firm to move on to new average cost curves. For each size of firm there is an equivalent short run average cost curve. As the firm expands, it moves on to different short run average cost curves. If expanding the scale of output leads to a lower average cost for each level of output then the firm is said to be experiencing economies of scale, How a firms output responds to a change in factor inputs called returns to scale.

Nonetheless, diseconomies of scale can arise when firms become too large and average costs rise Productive efficiency takes place when production occurs at the lowest cost. For a long run average cost curve, this occurs at the bottom of the U shape. This is called the minimum efficient scale MES of production. To the right, they will be either the same constant returns or will be increasing diseconomies of scale The nature of the economy of scale can take the form of Technical Economies: these economies directly arise from the production process.

The main sources of these particular economies are the specialization a firm can undertake as it grows and the indivisibility of plant. In the case of specialization, large organizations can employ more specialized labour, theoretically increasing productive efficiency. Second, in the case of indivisibility of plant, the fact that machines cant be broken to do smaller jobs e.

Large co operations can negotiate favorable prices. Moreover, they may have an advantage of keeping prices higher due to their market power Financial Economies: Small firms often find it difficult and expensive to raise finance for new investment. They have more flexibility, negotiation power and can utilize the skills of merchant banks.

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Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Microeconomics. Diminishing Marginal Returns vs. Returns to Scale: An Overview In business, it is important to reach a level of optimal production.

Key Takeaways Diminishing marginal returns is an effect of increasing an input after an optimal capacity has been reached leading to smaller increases in output. Returns to scale measures the change in productivity after increasing all inputs of production in the long run.

Under the law of diminishing marginal returns, removing inputs to a point can result in cost savings without diminishing production. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.