... in cost per unit of output that follows from larger scale production. An increase in output doesn't always mean a smaller increase in the input process. When average costs don't change with the scale of production there are constant returns to scale. When an increase in the production process leads to higher average costs then decreasing returns to scale or diseconomies of scale are in existence. The diagram below shows a firm that exhibits both economies and diseconomies of scale: Figure 1. Economies and Diseconomies of Scale. Economies of scale push the firm's costs down to A*. Beyond A* the firm encounters diseconomies of scale. A* is the level of production where average costs is at its lowest level; this is also referred to as the minimum efficient scale. These economies of scale can all be found within a firm and as such they are known as internal economies of scale. Other types ...

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