Final answer:
Economies of scale occur when the cost per unit decreases as the quantity of output increases. A large or very large plant with economies of scale is required for efficient capital usage to be effective.
Step-by-step explanation:
Economies of scale refer to the situation where, as the quantity of output increases, the cost per unit decreases. This means that a larger factory can produce at a lower average cost than a smaller factory. In order for efficient capital usage to be effective, a large or very large plant with economies of scale would be needed to compete in the market and produce and sell output at a lower price.
For efficient capital usage, the scale of plant production should achieve economies of scale where larger production volumes lower the unit cost. Small to medium plants are less competitive than larger ones due to higher average costs. However, beyond a certain scale, increasing production size does not reduce costs further.
In general, for efficient capital usage to be effective, production characteristics and plant size scale need to be optimized. The optimal scale of production typically involves achieving economies of scale, where the cost per unit decreases as the quantity of output increases. This principle supports the fact that a larger plant can produce and sell its product at a lower price than a smaller one, granting it competitive advantage in the market.
However, this efficiency in scale only operates up to a certain point (point L in the example). Beyond this point, simply increasing the scale of production does not continue to reduce average costs of production.
Firms, especially those operating small or medium plants like S or M, will struggle to compete with larger or very large plants, such as L or V, since the latter can sell similar goods for a lower price thanks to their larger scale and resultant lower average costs. However, this efficiency plateaus after a certain scale (from L to V), where further expansion does not translate into reduced costs, in which case careful consideration is required to prevent inefficiencies and increased costs.