Average Fixed Cost vs Economies of Scale
Average Fixed Cost and Economies of Scale are two Production & Costs concepts in AP Economics that students often mix up. Average Fixed Cost is the fixed cost per unit of output produced. Economies of scale occur when long-run average total cost decreases as output increases. Here is how they compare side by side.
It is found by dividing total fixed cost by quantity of output. Since fixed costs do not change with output, average fixed cost continuously declines as output increases.
This happens due to factors like specialization, bulk purchasing, or more efficient technology as the firm expands. It leads to lower per-unit costs and gives larger firms a cost advantage in the market.
Average Fixed Cost vs Economies of Scale: Spreading a Cost Is Not Growing Efficiently
| Average Fixed Cost | Economies of Scale | |
|---|---|---|
| Time frame | Short run, when at least one input is fixed | Long run, when every input including plant size can change |
| What is being compared | The same plant producing more units | Different plant sizes, each producing at its own best output |
| Why it happens | Arithmetic, an unchanged fixed cost divided by a bigger number | Specialization, volume input pricing, and capital that only comes in large units |
| Does it ever run out | No, it falls at every output without limit | Yes, past minimum efficient scale it becomes diseconomies of scale |
| Which curve shows it | One component of a short-run cost diagram | The downward-sloping stretch of the long-run average total cost curve |
| Does it guarantee average cost falls | No, average total cost rises once average variable cost climbs faster | Yes, falling long-run average total cost is the definition |
Average fixed cost can be falling while the firm suffers diseconomies of scale
The two ideas can point in opposite directions at the same moment, which is the cleanest proof they are not the same thing. Push the larger plant from the example above to 40 units. It was built for 20, so crowding drives its variable cost per unit from 6 up to 12, giving a total cost of 120 plus 480 and an average total cost of 15. A still larger plant with a fixed cost of 200 and a variable cost of 8 per unit manages 13 at that output. The best the firm can do at 40 units is therefore 13, up from the 12 it achieved at 20 units, so long-run average total cost has turned upward and the firm has entered diseconomies of scale. Meanwhile average fixed cost is falling in every one of those plants, the biggest included: 200 divided by 40 is 5, down from 200 divided by 20. A student who treats falling average fixed cost as evidence of economies of scale would report the exact opposite of what the long-run curve shows. Scale is judged by what happens to long-run average total cost, never by what happens to one component of a short-run curve.
The long run has no fixed costs, so it has no average fixed cost curve
By definition the long run is the horizon over which every input can be varied, including the plant, the lease and the machines. Nothing is fixed, so there is no fixed cost, no average fixed cost curve, and no fixed-cost spreading available to explain anything. A long-run cost curve is built by asking, at each output, which plant size produces it most cheaply, then tracing the lowest of those short-run average total cost curves. Falling stretches of the traced curve come from real sources: workers who specialize as the operation grows, inputs bought at volume discounts, and equipment worth installing only above a certain output. Rising stretches come from coordination problems, longer management chains and the difficulty of monitoring a large workforce. None of those forces is arithmetic. When a question asks why a firm's cost per unit falls, check which horizon it describes. If the plant is fixed and only output varies, the answer involves fixed cost being spread while diminishing returns pull the other way. If the firm is deciding how big to build, the answer is economies of scale. The two families of curves sit side by side at /micro/production-costs.
Frequently asked questions
Is spreading fixed costs the same as economies of scale?
Spreading fixed costs and economies of scale are different effects on different time horizons. Spreading fixed costs happens in the short run inside one plant, where a total fixed cost that never changes is divided among more units. Economies of scale happen in the long run, when a firm builds a larger operation and its long-run average total cost falls thanks to specialization, volume input pricing and larger equipment. A firm can be spreading fixed costs while its long-run average cost is rising.
Do economies of scale exist in the short run?
Economies of scale is defined only in the long run, when a firm can vary every input including plant size. In the short run at least one input is fixed, so the firm slides along a single short-run average total cost curve rather than choosing between plants. Falling cost per unit at low short-run output reflects fixed cost being spread over more units, which is a separate mechanism with a separate name.
Can average fixed cost fall while a firm has diseconomies of scale?
Average fixed cost falls at every output in every plant, including plants large enough to suffer diseconomies of scale, so the two happen together routinely. Diseconomies of scale is a statement about long-run average total cost rising as the firm builds bigger, usually because coordination and management costs grow faster than output. Falling average fixed cost inside any one of those plants says nothing about that long-run comparison.
Live Production Costs graph. Drag the curves, or open the full version.
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