... point at the end of the line 'B'. Economies of scale imply that a given increase in the amount of production factors will cause a more than proportionate increase in quantity produced. Diseconomies of scale imply the opposite. In the case of constant economies, the change in production factors will lead to an analogous change in quantity produced. More formally, economies of scale arise if the cost function is subadditive (Tirole, 1990). The cost function is subadditive, if for any n- tuple of outputs q1... qn, ?C(qi)> C(?qi) Causes of scale economies The sources of economies of scale are many and well- established. Technical or plant economies of scale * Specialisation Specialisation can be even more intense and sophisticated in the long run period, because production factors can adjust to the specialised needs of the production process. * Indivisibilities or 'principle of multiples' Many small firms find that they need equipment but are unable to ...

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