Economies and Diseconomies of Scale

As a firm grows, its long-run average costs (LRAC) change. When growth leads to falling average costs, the firm enjoys economies of scale. When a firm becomes too large and average costs begin to rise, it suffers from diseconomies of scale. Understanding these concepts — and their subtleties — is essential for evaluating whether growth is a sound strategic decision.

---

Economies of Scale

Economies of scale are the cost advantages that a firm gains as it increases its scale of production. They cause the long-run average cost curve to slope downwards. Economies of scale can be internal (arising within the firm) or external (arising from the growth of the industry).

Internal Economies of Scale