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1. Distinguish economies and diseconomies of scale. How can the extent to which economies and one scale explain the size and
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Answer #1

Solution 1: Economies of scale can be defined as, when sales of a firm or output of a firm increases the average cost or the per unit cost of production gets reduced. For example an automobile firm produces 10 cars with input of 10 units of steel, after certain improvement in the technology the same automobile firm is able to produce 15 cars with the same amount of steel.

On the other hand, Diseconomies of scale is just the opposite of economies of scale in which the average cost or the per unit cost of production increases as a firm increases its output or sales. For example an automonile firm produces cars which include two types of components, if one component is produced at a slower rate as compared to the other component the per unit cost of production increases.

The economies and diseconomies of scale determine the size and number of firms as the larger the firm the more it is developed and efficient and more are the cost savings. More amount of production reduces costs and hence is beneficial as compared to the smaller firms which produce less. In the diseconomies of scale there is a disadvantage in production costs, hence in the long run the costs and the demand determines whether the firm will be able to exist in the market or not.

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