What are economies of scale? What is the main source of economies ...

[Mr3Hunna]

What are economies of scale? What is the main source of economies of scale?
 
  What will be an ideal response?

Question 2

Assume a customer of natural gas is negotiating with his supplier over the telephone. At the time prices of all the supplier's competitors are precisely the same.
 
  The customer tells the supplier that if he raises his price even one penny he will walk away. What does the perceived demand curve for natural gas look like for this customer? Why?

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Answer to Question 1

Economies of scale are when a firm increases its plant size and labor employed by the same percentage and its output increases by a larger percentage so that its average total cost decreases. Economies of scale result because of specialization. When a firm increases its capital stock, the capital can be more specialized and hence produce more output than less specialized, more generalized capital. Similarly, when a firm increases its labor force, it can hire more specialists, each of whom is better at doing his or her assigned task than a less specialized individual. As a result of specialization, the firm's average product increases so that its average total cost decreases.

Answer to Question 2

The elasticity of demand is perfectly elastic. The demand curve is horizontal at the current price. The customer is likely to behave this way since he sees that there are other suppliers willing to offer the same price for essentially what he perceives to be a homogeneous good.