1. Copyright © Texas Education Agency, 2011. All rights reserved. 1

2. 2 “Copyright and Terms of Service Copyright © Texas Education Agency. The materials found on this website are copyrighted © and trademarked ™ as the property of the Texas Education Agency and may not be reproduced without the express written permission of the Texas Education Agency, except under the following conditions: 1)Texas public school districts, charter schools, and Education Service Centers may reproduce and use copies of the Materials and Related Materials for the districts’ and schools’ educational use without obtaining permission from the Texas Education Agency; 2) Residents of the state of Texas may reproduce and use copies of the Materials and Related Materials for individual personal use only without obtaining written permission of the Texas Education Agency; 3) Any portion reproduced must be reproduced in its entirety and remain unedited, unaltered and unchanged in any way; 4) No monetary charge can be made for the reproduced materials or any document containing them; however, a reasonable charge to cover only the cost of reproduction and distribution may be charged. Private entities or persons located in Texas that are not Texas public school districts or Texas charter schools or any entity, whether public or private, educational or non-educational, located outside the state of Texas MUST obtain written approval from the Texas Education Agency and will be required to enter into a license agreement that may involve the payment of a licensing fee or a royalty fee. Copyright © Texas Education Agency, 2011. All rights reserved.

3.  Factors that cause a producer’s average cost per unit to fall as output rises. Factors may be:  Internal - cost reduction due to technological and management factors  External - cost reduction due to the effect of technology in an industry  Ford Motor Company was able to mass produce affordable cars in minimal time because of economies of scale. 3 Copyright © Texas Education Agency, 2011. All rights reserved.

4.  Increase in long-term average cost of production as the scale of operations increases beyond a certain level. May be caused by:  over-crowding where men and machines get in each other's way,  greater wastage due to lack of coordination  a mismatch between the optimum outputs of different operations 4 Copyright © Texas Education Agency, 2011. All rights reserved.

5.  A graph of the costs of production as a function of total quantity produced.  Used to find the optimal point of production, where companies make the most profits. 5 Copyright © Texas Education Agency, 2011. All rights reserved.

6.  Captures the relation between cost per unit and the level of output, ceteris paribus.  Firms organize their factors of production in such a way that the average cost of production is at lowest point and intersects Marginal Cost. 6 Copyright © Texas Education Agency, 2011. All rights reserved.

7.  Depicts what the minimum per-unit cost of producing a certain number of units would be if all productive inputs could be varied.  U-shaped  Reflects economies of scale when negatively-sloped and diseconomies of scale when positively sloped. 7 Copyright © Texas Education Agency, 2011. All rights reserved.

8.  Depicts what the minimum per-unit cost of producing a certain number of units would be if all productive inputs could be varied.  U-shaped  Reflects economies of scale when negatively-sloped and diseconomies of scale when positively sloped. 8 Copyright © Texas Education Agency, 2011. All rights reserved.

9.  Production process with neither economies nor diseconomies of scale.  The output of the process increases or decreases simultaneously and in step with increase or decrease in the inputs.  A plant with constant returns to scale is equally efficient in producing small batches as it is in producing large batches. 9 Copyright © Texas Education Agency, 2011. All rights reserved.

10.  Describe economies of scale.  Compare short-run and long-run curves.  What is meant by diseconomies of scale?  Describe constant return of scale.  What is the difference between diminishing returns and economies of scales? 10 Copyright © Texas Education Agency, 2011. All rights reserved.