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Production Economics Notes
Production Economics Notes
Diminishing marginal returns ( short run only) : when more units of variable factors are
added to a given quantity of fixed factors successively , the marginal product of the variable
factors diminish
Economies of scale( long run only) : when the long run average cost decreases
Optimal scale : long run average cost is the lowest
Examples of Internal economies of scale ( when the firms expand on their own) :
1) Marketing economies of scale : the cost of advertising is spread over a larger
amount of output
2) Purchasing economies of scale : bulk purchase helps obtain greater discounts
3) Financial economies of scale : larger firms can take out larger loans easily
4) Managerial economies of scale : wider scope of specialisation can raise efficiency
Types of expansion
Type Definition Advantage
Horizontal expansion Expand to similar and competitive industry Greater market share /
make use of existing resources
Lateral expansion Expand to similar but not competitive industry Spread risk by
product diversification / make use of brand name
Vertical forwards expansion Expand to industry involving next stage of production
Ensure market outlet
Vertical backwards expansion Expand to industry involving previous stage of
production Reduce training time for factor inputs / ensure steady supply of factor inputs
Conglomerate expansion Expand to unrelated industry Spread risk by product
diversification / make use of brand name