Costs and Economies of Scale

Costs and Economies of Scale

Discuss the difference between how accountants and economists calculate profit giving example of costs each might use in this calculation.

The difference that exists between how accountants and economists calculate profits regards implicit cost. Accountants use explicit costs only when calculating profit. Accountants deal with funds that have actually been spent. Accountants compute profit by subtracting explicit costs from revenue and adjusting the depreciation. Economists use explicit costs and implicit costs to compute profit (Baumol, & Blinder, 2011). They calculate money spent and opportunity costs. Economic profit is given by subtracting implicit cost from accounting profit.

Why do firms experience diseconomies of scale as they increase production volume? 

Firms experience diseconomies of scale when the long-run average cost increases with the expansion of the firm’s output. At high levels of output, firms experience diseconomies of scale because of the decreased management control (Gwartney, 2013). With increased production volume, it becomes harder for the management to coordinate the activities of individual units within the firm.

How might firms “avoid” experiencing diseconomies of scale?

Firms might avoid diseconomies of scale in the following ways. First, the human resource management should focus on improving the recruitment process, communication training, retention, and promotion of employees. They are critical since skilled workers are required in situations when the firm experiences short supply. Second, the firm should use the performance related pay scheme to provide financial incentives to employees. This will improve industrial relations and the productivity of the company.



Baumol, W. J., & Blinder, A. S. (2011). Economics: Principles and policy. Mason, OH: South-Western, Division of Thomson Learning.

Gwartney, J. D. (2013). Microeconomics: Private and public choice. Mason: Ohio.

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