THEORY OF FIRMS AND SCALE OF PRODUCTION (PART 1)
The theory of firms explores how businesses operate, make decisions, and maximize profits. It examines how firms use resources to produce goods and services while managing costs, revenues, and market competition. The scale of production refers to the size of a firm’s operations, specifically how increasing or decreasing the quantity of output affects costs and efficiency. As firms expand production, they may experience economies of scale, where average costs decrease due to increased production, leading to greater efficiency. Conversely, if production grows too large, firms may face diseconomies of scale, where costs per unit increase due to inefficiencies. The optimal scale of production is where firms balance cost efficiency with capacity to meet demand effectively.