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Relatively straightforward question regarding supply and demand

Why are firms more capable of benefitting from economies of scale if there's less firms in the market, as in how and why are they able to produce more?

If there are less firms, the firm still left in the market will have more market share and so will increase output to meet the higher consumer demand, and therefore will benefit from economies of scale.

Is that correct?

Any help would be appreciated.
Original post by dont know it
Why are firms more capable of benefitting from economies of scale if there's less firms in the market, as in how and why are they able to produce more?

If there are less firms, the firm still left in the market will have more market share and so will increase output to meet the higher consumer demand, and therefore will benefit from economies of scale.

Is that correct?

Any help would be appreciated.


It sounds correct to me. As you said, if there are less firms than each firm in that market has a higher market share than a densely populated market. This means there are more consumers buying their products (assuming the number of consumers between the less populated market and the higher populated market are the same) and so will be producing more. Thus they can buy in greater bulk and benefit from economies of scale in that way.
Original post by CatusStarbright
It sounds correct to me. As you said, if there are less firms than each firm in that market has a higher market share than a densely populated market. This means there are more consumers buying their products (assuming the number of consumers between the less populated market and the higher populated market are the same) and so will be producing more. Thus they can buy in greater bulk and benefit from economies of scale in that way.


Thank you, greatly appreciated answer.
Reply 3
Avatar for jpt4749
jpt4749
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If I’m not mistaken when number of firms increases, each firm will have to produce less and this reduces the benefits of scale economies and this concept works well when average cost declines with increasing productive capacity.

In other words, fixed cost will be spread on lower unit of output when number of firm rises and the saving from reduction in average costs will diminish :smile:
Original post by Nathan9087
If I’m not mistaken when number of firms increases, each firm will have to produce less and this reduces the benefits of scale economies and this concept works well when average cost declines with increasing productive capacity.

In other words, fixed cost will be spread on lower unit of output when number of firm rises and the saving from reduction in average costs will diminish :smile:


Ah thank you!
Original post by dont know it
Why are firms more capable of benefitting from economies of scale if there's less firms in the market, as in how and why are they able to produce more?

If there are less firms, the firm still left in the market will have more market share and so will increase output to meet the higher consumer demand, and therefore will benefit from economies of scale.

Is that correct?

Any help would be appreciated.


Hi there,

There are many ways to explain this, but as Economics is all about assumptions - you have to write the assumptions you make.

If there are less firms in the market, it is more concentrated. As you have said, it means that the individual firms will have a greater share in the market and therefore will produce more output if the goods are demanded by consumers. As they increase more output, they will spread their fixed costs over a larger output and therefore average fixed costs will decrease. The same is for variable costs, but this depends on the law of diminishing marginal returns - in the short run and obviously productivity plays a big factor. There may even be diseconomies of scale occuring if the firm becomes too large. So you have to be careful and make sure you note down the assumptions under which your statements are true.

Another reason may be due to the concentration of the market, the firms may have monopoly power to drive up the prices and reduce output in the short run, leading to supernormal profits. These profits can be used and invested in research and development and the latest technology to improve current production processes, leading to more efficient methods of production, increasing productivity and reducing average costs - benefitting from economies of scale.

It also depends on the concentration of the market. For example, a natural monopoly is known to have the benefits of having the potential to fully exploit internal economies of scale and reach long-run productive efficiency because they are the only firm in the market. It's all to do with the high fixed costs of production and their potential to invest in research and development and many other factors e.g. credit rating, if they wish to borrow (it'll be high i.e. benefit from financial economies of scale).

The supernormal profits can also be used to heavily advertise the products creating brand loyalty and an inelastic demand for the product.

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