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Output per time period (units)

Output per time period (units)

Output per time period (units)

used in smaller firms. Also, the productivity of equipment frequently increases with size much faster than its cost. A500,000-kilowatt electricity generator costs considerably less than two 250,000-kilowatt generators, and it also requires less fuel and labor when operated at capacity. Quantity discounts give rise to money-related pecuniary economies through large-scale purchasing of raw materials, supplies, and other inputs. These economies extend to the cost of capital when large firms have easy access to capital markets and can acquire funds at lower rates.

cost elasticity

Percentage change in total cost associated with a 1 percent change in output

At some output level, economies of scale are typically exhausted, and average costs level out and begin to rise. Increasing average costs at high output levels are often attributed to limitations in the ability of management to coordinate large-scale organizations. Staff overhead also tends to grow more than proportionately with output, again raising unit costs. The current trend toward small to medium-sized businesses indicates that diseconomies limit firm sizes in many industries.

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