What is the meaning of optimum nature and size of plant and machinery?
Answers
Answer:
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.
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