yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

Economies and diseconomies of scale | APⓇ Microeconomics | Khan Academy


3m read
·Nov 11, 2024

In the last video, we were able to construct here in red this long run average total cost curve based on connecting the minimum points or the bottoms of the u's of our various short run average total cost curves. Each of those short run average total cost curves were based on a certain amount of fixed costs in the short run.

But in the long run, you can change your fixed costs, and here are fixed costs for the number of trucks. So we can vary it to optimize for a certain amount of quantity. Now, when we did that, you could see a little trend here. Especially as we go up to the way I drew it, it wouldn't necessarily be up to 200 of whatever you're producing.

But the way I drew it, you see that this part right over here looks like our long run average total cost curve is declining down. So one way to think about it is we are getting more and more efficient at producing our tacos in the long run as we produce more of them until we get to 200 tacos.

At this part of our curve, we are experiencing economies of scale. We've talked about where economies of scale can come from; it can come from specialization of labor or even machine specialization. As you get more and more scaled, you can have different parts of your process specializing in baking the taco shells or grating the cheese or cooking the meat—whatever it is.

So there's specialization. You could get better at sourcing, so as you get more scale, you might be able to order more of your supplies at a time. This way, you get better deals. You might be able to even, who knows, at some point start a farm yourself and then cut out the middlemen, and so forth and so on.

Now, as we get past that point, we see that our long run average total cost curve, at least in this example, started to trend up. So this part of the curve, you could say that we are experiencing diseconomies of scale.

What would cause diseconomies of scale? Well, these would most typically happen because of what are known as coordination issues. As an organization grows, you have more people, more resources that you have to coordinate, and that complexity can sometimes make an organization more inefficient.

There are other diseconomies of scale; at some very large scale, you might be depleting all of the low hanging fruit of your inputs. So you have to pay more for some of your inputs. Maybe you've already depleted the people who are willing to work for less, so you have to raise wages.

Or you've depleted a lot of the resources you need, so you have to find new, more expensive resources. Now, in this curve, it's not as obvious, but you can also have a notion of constant returns to scale.

So if we had a long run average total cost curve that looked something like this—let me draw it over here—then in this section right over here, as the average total cost, the long run average total cost, is going down, that would be economies of scale.

This section over here, as the long run average total cost is going up, that would be our diseconomies of scale. But this section over here, where it is constant, you might guess what that is called. That is referred—that is called constant economies of scale or constant returns to scale, sometimes known as efficient scale.

More Articles

View All
The Gay Rights Playbook Is a Model for Change in America | Evan Wolfson | Big Think
Gay people have been seeking the freedom to marry in the United States since what we talk about as the dawn of the modern gay rights movement. We usually date that movement’s beginning a little erroneously to Stonewall and the pushback against police hara…
How to sell private jets to billionaires
This is a day in the life of a private jet broker. My day starts in a meeting with No. She’s an interior designer. We discussed renovating my fuselage. Nor presented intriguing designs for new lighting, new carpet, and even suggests adding a bed—a mini be…
Reddit Disinformation & How We Beat It Together - Smarter Every Day 232
Hey, SV Dustin! Welcome back to Smarter Every Day. Unfortunately, now is the time for the video about disinformation on Reddit, the front page of the internet. It’s been documented by both the European Union and the United States of America that Russia, I…
8 STOIC TIPS FOR SOLVING PROBLEMS WITH PEOPLE | STOICISM INSIGHTS
Have you ever felt utterly overwhelmed by the noise around you, the endless stream of opinions, expectations, and the relentless pressure of ‘keeping up’? Imagine this: ancient stoic philosophers over 2,000 years ago faced the same human emotions, struggl…
Summarizing stories | Reading | Khan Academy
Hello readers! Today I’ll make a video about summaries. A summary retells the main ideas of a passage, but in a much shorter version. Cool, great, done! You can learn anything. David out. Sorry, I made a goof. See, I summarized what was going to happen …
Which credit card is better for you? | Consumer credit | Financial Literacy | Khan Academy
And now we are going to play the game: which credit card is better for you? The reason why I’m saying “for you” is because, in many cases, one credit card could be better than another person depending on how they plan on using it. So pause this video and …