Optimum Firm:
Definition
and Explanation:
Optimum firm is that
firm which fully utilizes its scale of operation and produces
optimum output with the minimum cost per unit production.
In the short-run, a firm
would build the scale of plant and operate it at a point where
the average cost is at its minimum. This is regarded as the
optimum level of production for the firm concerned,
if the demand for the product increases from this least cost
output; it cannot change the amount of land, buildings,
machinery and other input in short period of time. It has to
move along the same scale or type of plant. The average total
cost, therefore, begins to rise due to the diseconomies of the
scale.
In the long run, all inputs are
variable. The firm can build larger plant sizes or revert to
smaller plants to deal with the changed demand for the product.
If the size of plant increases to cope with the increased
demand, the average cost per unit begins to fall due to the
economies of scale such as increased specialization of labor,
better and greater specialization of management, efficient
utilization of productive equipment, etc., etc. So long as the
resources are successfully utilized, the average cost of
production continues declining.
Eventually a stage comes when the
firm is not able to use the least cost combination of inputs.
The building of a still larger plant cause the average cost of
production to go up. The point at which the per unit cost is the
lowest is the optimum level of production for the firm. The firm
of the most efficient size.
Diagram/Figure:
The concept of the optimum firm can be
explained with the help of the following figure:
In the diagram (10.1) units of
output are measured along OX axis and units of cost along OY
axis. In this figure, there are four alternative scales of
plant. SAC1, SAC2, SAC3 and SCA4.
If the anticipated output rate is OK, the firm should choose the
smallest plant, SAC1. This is due to the fact that
the cost per unit for OK output is lowest at point A on plant
SAC1. If the anticipated output rate is OL plant SAC2
yields lowest cost per unit at point B. This is the optimum
plant of the firm and is of the most efficient size. If a larger
plant of the SAC3 size is constructed to meet the
rising demand for the product, then the economies of the scale
mainly of managerial nature arise. The per unit cost of
production begins to arise. Thus the scale SAC2
represent the optimum plant and BL is the least cost output of
this plant.
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