{"id":631,"date":"2019-10-10T13:27:00","date_gmt":"2019-10-10T13:27:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=631"},"modified":"2026-01-07T10:34:36","modified_gmt":"2026-01-07T10:34:36","slug":"effects-economies-diseconomies-scale-production","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/effects-economies-diseconomies-scale-production\/","title":{"rendered":"Economies and Diseconomies of Scale"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Topics in Demand and Supply Analysis (2022 Level I CFA\u00ae Exam \u2013 Reading 8)\",\n  \"description\": \"This video covers demand and supply analysis, including elasticity measures (price, income, and cross-price), substitution and income effects, normal and inferior goods, and diminishing marginal returns. It explains breakeven and shutdown points, economies and diseconomies of scale, and their impacts on production costs and efficiency.\",\n  \"uploadDate\": \"2018-11-04T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/peZTnpzYHPg\/default.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/peZTnpzYHPg\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/peZTnpzYHPg\",\n  \"duration\": \"PT22M55S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2.png\",\n  \"caption\": \"Image showing Economies of Scale\",\n  \"width\": 974,\n  \"height\": 764,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f.png\",\n  \"caption\": \"Image showing Diseconomies of Scale\",\n  \"width\": 974,\n  \"height\": 764,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"A firm that increases the quantity it produces without any change in per-unit cost is experiencing:\",\n    \"text\": \"A firm that increases the quantity it produces without any change in per-unit cost is experiencing:\",\n    \"answerCount\": 1,\n    \"upvoteCount\": 0,\n    \"dateCreated\": \"2025-12-16T00:00:00+00:00\",\n    \"author\": {\n      \"@type\": \"Organization\",\n      \"name\": \"AnalystPrep\"\n    },\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. When output increases proportionally with inputs and per-unit cost remains unchanged, the firm is experiencing constant returns to scale. This situation reflects neither economies nor diseconomies of scale.\",\n      \"dateCreated\": \"2025-12-16T00:00:00+00:00\",\n      \"upvoteCount\": 0,\n      \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/effects-economies-diseconomies-scale-production\/\",\n      \"author\": {\n        \"@type\": \"Organization\",\n        \"name\": \"AnalystPrep\"\n      }\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" \n  width=\"611\" \n  height=\"344\" \n  src=\"https:\/\/www.youtube.com\/embed\/peZTnpzYHPg\" \n  title=\"YouTube video player\" \n  frameborder=\"0\" \n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" \n  referrerpolicy=\"strict-origin-when-cross-origin\" \n  allowfullscreen>\n<\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Economies of Scale<\/strong><\/h2>\n\n\n\n<p>Economies of scale refer to the cost advantage brought about by an increase in the output of a product. Economies of scale arise due to the inverse relationship between the per-unit fixed cost and the quantity produced \u2013 the greater the production, the lower the fixed costs per unit. This is because the production costs have been spread out over a large number of goods. As a result, synergies and operational efficiency cause a reduction in variable costs. From this, economies of scale can be divided into two categories:<\/p>\n\n\n\n<!--more-->\n\n\n\n<ul class=\"wp-block-list\">\n<li>internal economies of scale: arising from within a company; and<\/li>\n\n\n\n<li>external economies of scale: arising from extraneous factors such as the size of the industry.<\/li>\n<\/ul>\n\n\n\n<p>Economies of scale can result from:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>increasing returns to scale;<\/li>\n\n\n\n<li>division of labor and good management;<\/li>\n\n\n\n<li>ability to afford more expensive and reliable equipment;<\/li>\n\n\n\n<li>effective waste reduction and lowering costs;<\/li>\n\n\n\n<li>utilizing market information maximally; and<\/li>\n\n\n\n<li>obtaining discounted prices.<\/li>\n<\/ul>\n\n\n\n<div style=\"margin: 20px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     class=\"ap-cta\"\n     data-cta-text=\"Want to practice economies\/diseconomies of scale problems\"\n     data-cta-type=\"button\"\n     data-cta-location=\"top_content\"\n     data-page-type=\"study_note\"\n     style=\"\n       display: inline-block;\n       padding: 10px 16px;\n       font-size: 14px;\n       font-weight: 600;\n       color: #0b5ed7;\n       border: 2px solid #0b5ed7;\n       border-radius: 6px;\n       text-decoration: none;\n       background-color: transparent;\n     \">\n    Want to practice economies\/diseconomies of scale problems? Try AnalystPrep\u2019s free trial now.\n  <\/a>\n<\/div>\n\n\n<\/p>\n<h3><strong>Example of Economies of Scale<\/strong><\/h3>\n<p>A family wants to print wedding invitation cards for their daughter\u2019s wedding. Printing 500 cards costs $1,000. However, printing 1,000 invitation cards will cost them $1,500. Therefore, while printing 500 cards will cost them $2 per invitation card, printing 1,000 copies will cost $1.5 per card. This is because the price will fall after the initial set-up costs of the printer have been covered. As a result, this leaves only a marginal extra printing cost for every additional card.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-15003 size-full\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2.png\" alt=\"Image showing Economies of Scale\" width=\"974\" height=\"764\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2-300x235.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2-768x602.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-2-400x314.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>Note that LRAC represents long-run average costs.<\/p>\n<h2><strong>Diseconomies of Scale<\/strong><\/h2>\n<p>Diseconomies of scale occur when the cost per unit increases with an increase in the quantity produced. This means that any attempt by a firm to increase its output will transcend to a corresponding increase in the unit cost associated with the unit increase in output.<\/p>\n<p>This usually happens when a firm becomes too big. It is represented on the following graph when going from Q1 to Q2. Beyond point Q1, which is the ideal firm size, producing more goods increases per-unit costs.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-15004 size-full\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f.png\" alt=\"Image showing Diseconomies of Scale\" width=\"974\" height=\"764\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f.png 974w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-300x235.png 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-768x602.png 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/10\/12f-400x314.png 400w\" sizes=\"auto, (max-width: 974px) 100vw, 974px\" \/><\/p>\n<p>Some factors that may lead to diseconomies of scale include:<\/p>\n<ul>\n<li>decreasing returns to scale;<\/li>\n<li>a firm may become too large to properly manage itself;<\/li>\n<li>overlapping of business functions and duplication of product lines; and<\/li>\n<li>higher resource prices resulting from supply constraints.<\/li>\n<\/ul>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>A firm that increases the quantity it produces without any change in per-unit cost is experiencing:<\/p>\n<p>A. economies of scale;<\/p>\n<p>B. diseconomies of scale; or<\/p>\n<p>C. constant returns to scale.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is C.<\/p>\n<p><em>An increase in output proportional to an increase in input would be considered a constant return to scale. This is neither an economies nor diseconomies of scale.<\/em><\/p>\n<\/blockquote>\n<div class=\"notes_inv\">\n<hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n\n\n<div style=\"margin: 40px 0; padding: 30px; text-align: center; background-color: #f5f8fc; border-radius: 10px;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     class=\"ap-cta\"\n     data-cta-text=\"Start Free Trial\"\n     data-cta-type=\"button\"\n     data-cta-location=\"bottom_content\"\n     data-page-type=\"study_note\"\n     style=\"\n       display: inline-block;\n       padding: 14px 26px;\n       font-size: 18px;\n       font-weight: 700;\n       color: #ffffff;\n       background-color: #0b5ed7;\n       border-radius: 8px;\n       text-decoration: none;\n     \">\n    Start Free Trial \u2192\n  <\/a>\n  <p style=\"margin-top: 12px; font-size: 15px; color: #333;\">\n    Practice scale\u2011economics &#038; cost\u2011curve problems with full solutions and exam\u2011style drills.\n  <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Economies of Scale Economies of scale refer to the cost advantage brought about by an increase in the output of a product. Economies of scale arise due to the inverse relationship between the per-unit fixed cost and the quantity produced&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-631","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Economies vs. Diseconomies of Scale | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Discover how economies and diseconomies of scale impact production costs across various markets. 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