QUESTION 2) a) What is economies of scale? What is diseconomies of scale? b. What is economies of scope? c. What is learning by doing? d. What does it mean for a factor of production to have diminishing marginal product? e. What is the relationship between average total cost (ATC) and marginal cost (MC) of production? 

Question a

Economies of scale are the cost advantages gained by the company when production becomes efficient because of the scale of operation. The cost of each unit produced will decrease when there is an increase in the scale. For example, to supply electricity, a company has to invest in electric wires and posts which has a high fixed cost. However, since electricity is supplied to many households, the average cost goes down.

Diseconomies of scale occur when a business grows large that the costs per unit increase. It happens when the economies of scale are no longer functional within a business. When applying the principle, a company will see an increase in the costs when the outputs are increased. The diseconomies of scale happen when there are issues in the production process, when there are resource constraints in the production process and when there are organizational issues in the overall management of an organization.

Question b

Economies of scope means that the production of a particular good reduces the overall cost used in producing a related good. Economies of scope occur when the cost used to produce a product reduces as a wider variety of the products increases. That means the more different but similar commodities you produce within a firm, the lower the cost used in producing each one of them.

Question c

Learning by doing in economics means that overall productivity can be achieved through more practice, innovations, and self-perfection. For instance, a clothing company can increase its overall output when it learns how to use the equipment in a better way without investing more capital or adding more workers.

Question d

A factor of production will have diminishing marginal productivity when using an increasing amount of variable inputs during the process of production lead to decreased productivity. The total returns from the aggregate units of production will increase until it levels off. Afterward, the total returns will start declining. The changes in the factors of production as inputs will have a positive effect on the outputs at first. However, each additional unit produced will have a smaller marginal production return than the units before it as the production proceeds.

Question e

Average total cost (ATC) and marginal cost (MC) are related in that whenever the MC is less than the ATC, the ATC is considered to be falling. When the marginal cost (MC) is greater than the ATC as shown in the graph below, ATC starts to rise. Lastly, when the ATC reaches the minimum point as shown in the graph, the marginal cost will be equal to the average total cost.

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