lower average cost than a smaller factory.
176 7 • Production, Costs, and Industry Structure

Figure 7.9 illustrates the idea of economies of scale, showing the average cost of producing an alarm clock

falling as the quantity of output rises. For a small-sized factory like S, with an output level of 1,000, the average

cost of production is $12 per alarm clock. For a medium-sized factory like M, with an output level of 2,000, the

average cost of production falls to $8 per alarm clock. For a large factory like L, with an output of 5,000, the

average cost of production declines still further to $4 per alarm clock.

FIGURE 7.9 Economies of Scale A small factory like S produces 1,000 alarm clocks at an average cost of $12 per

clock. A medium factory like M produces 2,000 alarm clocks at a cost of $8 per clock. A large factory like L produces

5,000 alarm clocks at a cost of $4 per clock. Economies of scale exist when the larger scale of production leads to

lower average costs.
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