Chapter 19: Problem 725

What are economies of scale? What is meant by "indivisibilities in the technology?"

Short Answer

Expert verified

Economies of scale are cost advantages businesses experience as production volume increases, resulting in lower average cost per unit due to factors like specialization, efficiency, and negotiation. Indivisibilities in technology refer to the existence of certain infrastructure, equipment, or processes that cannot be scaled down or divided into smaller units, leading to cost inefficiencies at lower production levels. These indivisibilities drive firms to operate on a larger scale, benefiting from economies of scale and increased efficiency.

Step by step solution

Define Economies of Scale

Economies of scale are the cost advantages that a business can realize as the scale of production increases. This means that as the production volume goes up, the average cost per unit goes down. Factors such as specialization, increased efficiency, negotiation, and spreading overhead costs can all contribute to economies of scale.

Explain Economies of Scale

The primary reason behind economies of scale is that larger firms can achieve greater efficiencies than smaller firms. This can be because bigger firms are able to take advantage of specialized labor, invest in efficient technology, and negotiate better terms with suppliers. The result is that as the firm's output increases, its cost per unit decreases, allowing the firm to either be more competitive on the market or achieve higher profit margins.

Define Indivisibilities in Technology

Indivisibilities in technology refer to the existence of certain infrastructure, equipment, or processes that cannot be scaled down or divided into smaller units. This means that these indivisible components of the production process will be available in fixed quantities, making it difficult for the firm to adjust its production level without encountering substantial cost inefficiencies.

Explain Indivisibilities in Technology

A firm might encounter indivisibilities in technology while investing in expensive equipment that is designed to handle large-scale production processes. If this equipment cannot be scaled down to accommodate smaller production volumes, the firm will have to keep the production level at the optimal capacity to minimize the average per-unit cost. In this scenario, indivisibilities in technology will lead the firm to operate on a larger scale, thereby benefiting from economies of scale and increasing its overall efficiency.

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