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Why don't firm try to maximize their economies of scale and run their operation on the largest possible scale?
Wiki User
∙ 11y ago
It costs money to invest in equipment to increase production up to the frontier where maximum economy of scale exists. But the market demand -- the buyers -- might not be rich and strong enough to take up this extra output, meaning you end up with unsold goods and a market surplus. In turn, a surplus and unsold stock means you must now lower your selling price to get rid of it -- and this changes the "maximum economy of scale" frontier back inward. You're now over-producing, not maximising! As you can see, the "maximum economy of scale" isn't a eternally-fixed, theoretical point -- it's really a flexible and practical point which depends largely on the market conditions at any set moment in time.
Wiki User
∙ 11y ago
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