I was wondering whether these are contrary as one effectively says production becomes cheaper as production increases. To increase production you may need to upgrade from a standard machine to high capacity (like if a seemstress wanted to go from making friends clothes to a small buisness) which would cost alot more to produce more (diminishing returns). I know they are uneven but I'm I going wrong somewhere? Is diminishing returns an advantage of smaller buisnesses?


In production with more than one input, "diminishing returns" refers to what happens when we increase one input while keeping all the rest constant. "Economies of scale" is a more informal term for "increasing returns to scale" and so relates to what happens when we increase all inputs by the same proportion (while, and this is important, we keep the technology unchanged).

Perhaps it could help you to revisit your example based on the above standard definitions of these concepts.

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  • $\begingroup$ So don't these counteract each other when looking to increase production? @Alecos Papadopoulos $\endgroup$ – SRawes Jan 23 '17 at 19:38
  • $\begingroup$ @SRawes They refer to two different ways to increase production, so in what sense do they "counteract each other"? For example, if one increases all inputs by the same proportion, one cannot examine whether diminishing returns for one input appear, because, by definition, we examine diminishing returns per input by keeping all the other inputs constant. $\endgroup$ – Alecos Papadopoulos Jan 23 '17 at 19:43

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