Factors Affecting Optimum Firm – With Example And Diagram

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A firm secures large scale economies with the expansion of its size of production. As a result the firm produces with minimum costs. But it will be able to secure economies only up to a particular stage. Diminishing returns arise after a particular stage. When Diminishing returns arise, the dis-economies of a firm outweigh the economies. Cost of production increases due to the difficulty in management and co-ordination. So the firm expands its production until it receives increasing returns to scale. It has to stop production at that stage of least cost combination of factors. This is known as optimum firm.

In other words optimum firm is a firm which carries production up to a maximum level where the costs are minimum. A firm attains equilibrium when it reaches the optimum size of production. There are some characteristics of optimum firm. They are as follows:

Characteristics Of Optimum Firm

Average cost: We have to consider average cost for determining the optimum size of a firm. This average cost of the firm includes both short run costs and long run costs. That means we have to add the expenses incurred on depreciation, buildings etc.

Nature of Size: Optimum size is not a permanent one. It varies with the changes in managerial and technical knowledge.

Not Absolute: It may be noted that optimum size is not absolute one but a relative concept. The conditions of technology, marketing, competition, finance etc., vary from industry to industry. So we observe different optimum sizes in different industries.

The optimum size of a firm (optimum firm) is explained with the help of the following diagram.

In the diagram, quantity of output is represented along OX axis. OY axis denotes costs of the firm. AC is the curve showing the changes in average cost at different levels of output. The average cost falls up to point P and slopes upwards after that point. Here the firm enjoys increasing returns to scale. OM is the optimum output produced by a firm with the least cost of PM.