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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.




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.

Relevant Articles:

What is Scale of Production
Economies of Large Scale Production

Survival of Small Scale Firms

Localization of Industries
Optimum Firm

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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