Question

Firms that are operating in long run may benefit from economies of scale. Elaborate any FIVE ways a firm may enjoy advantages from economies of scale.

Answer 1

Answer: Five ways a firm may enjoy advantages from economies of scale are:

1. Economies of scale refers to the fact that, as the level of output increases in the long run, the cost of production declines mainly because the fixed cost becomes negligible with large level of production.

2. In the long run, firms usually produce on a large scale with different plant sizes. Thus the production process becomes more efficient and variable cost associated with the production process also declines and the firm enjoys economies of scale.

3. Also to enjoy economies of scale in the long run and to reduce the variable costs, the firm should buy large amount of input required for the production process.

4. Firms in the long run should employ better skilled workers who will utilise the inputs and capital more efficiently and will produce output in a minimum amount of time thus reducing both fixed and variable cost.

5. Operating on a larger plant with modern equipments can also results in economies of scale as it will enhance the capital productivity and as a result large amount of output can be produced and as we know average cost= total cost/ output, increasing level of production will lower the average cost level of the firm and the firm can enjoy economies of scale in the long run.