One possibility is that in some industries, as firms grow larger over time, average costs fall. If so, larger firms would have a cost advantage over smaller firms.

   This seems to be the case for consumer electronics, computers, and automobiles as well as many other industries. Industries for which LRAC are falling as output rises are said to have Increasing Returns to Scale (IRS), or are said to enjoy Economies of Scale. If LRAC is falling, LRMC must lie below it.

Copyright © 1995-2004, Inc. - All Rights Reserved