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The "diseconomies of scale" do not tend to vary widely by industry, but "economies of scale" do. An auto maker has very high fixed costs, which are lower per unit of output the more output is produced. On the other hand, a florist has very low fixed costs and hence very limited sources of economies
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in the graph's notation. With firms making economic profit and with free entry, other firms will enter the market for this product, and their additional supply will bring down the market price of the product; this process will continue until there is no longer any economic profit to entice further
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Thus with firms possessing U-shaped long-run average cost curves, perfect competition, with (1) firms small enough relative to the overall market that they cannot individually influence the product's market price, and with (2) free entry, leads in the long run to a situation in which no firm is
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An industrial society will tend to have large firms, as industry has substantial economies of scale. A service-based economy will favor smaller firms, as services have limited economies of scale. There will, of course, be exceptions, such as
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industry standards (like
Microsoft Windows), etc. If only these "economies of scale" applied, then the ideal firm size would be infinitely large. However, since both apply, the firm must not be too small or too large, to minimize unit costs.
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in the upper graph), and its per-unit economic profit is the difference between average revenue AR and average total cost ATC at that point, the difference being
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making economic profit, and in which firms are of their socially optimal size (producing at the minimum of their long-run average cost curve).
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existed, then the long-run average cost-minimizing firm size would be one worker, producing the minimal possible level of output. However,
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discounts (components, insurance, real estate, advertising, etc.) and can also limit competition by buying out competitors, setting
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indicated in the upper graph. The firm produces at the quantity of output where marginal cost equals marginal revenue (labeled
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After entry of enough other firms has occurred, their increase in market supply has driven down the price of the good, so that
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entrants. The long-run outcome is shown in the second graph, with production by each firm occurring at the newly labelled
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of scale. Thus there are disparate degrees of economies of scales for different types of organizations.
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also apply, which state that large firms can have lower per-unit costs due to buying at
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Bureaucratic limits of firm size: Empirical analysis using transaction cost economics
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Effects of agricultural, industrial, and service-based economies on optimal firm size
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diagram shows that as more is produced, so long as output does not exceed OQ
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