4.4.2 Economies and Diseconomies of Scale
Economy of scale refers to the reduction in average cost per unit increase in output; diseconomy of scale refers to the increase in average cost per unit increase in output. Through operational efficiencies (or inefficiencies) or by virtue of inherent features of the facility or its environment, the cost of producing each additional unit may rise or fall as production increases. For a given cost function, scale economies or diseconomies with respect to any output variable are typically represented by the index of that variable in the cost equation and can be investigated by plotting observed total or average unit cost vs. the output variable (Figure 4.6). Depending on facility type and level of output, the average cost at a certain output level, Vc, may increase (curve A) or decrease (curve C) or may remain the same (curve B).