Question

define economies of scale. Explain why economies of scale are so important.

Answer 1

Answer:

Economies of Scale: Economies of scale refers to reduced costs per unit of output that arise from increased total output of a product. Because as the output increases Total Fixed cost(TFC) per unit will decrease and TVC per unit will remain same as it vaires with output level.So tatal cost per unit will decrease.

TC=TFC+TVC (TVC=Total Variable cost)

Economies of Scale Curve

Economies of scale help a firm to use its resources to use at optimum level. It will also help a firm to increase the profit for the firm as well as consumer surplus by providing products at lower rate because Total cost per unit has been lowered by producing more output.It will also provide the firm a competitive advantage over others firms in market beacuse The firm's TC per unit will be less than other firms' TC per unit due to economies of scale concept.