Download Long-Run Production Costs

Long-Run Production Costs
Everything is Variable
Resource Adjustments
• In the Long-Run, a firm can undergo any
adjustments to its resource inputs.
• Unlike the Short-Run, there are no fixed
resources.
• It can alter its plant capacity, change
industries, and ultimately adapt to differing
market conditions.
Firm Size and Costs
• Since we can change
the size of our plant in
the Long-Run, we have
options A, B, or C.
• D is the Long-Run
Average Total Cost
Curve.
• It is made up of a series
of Short-Run Curves.
The Long-Run Cost Curve
• At the minimum of
curve A and curve C, the
firm should shift
production to a new
plant size.
• A different plant size is
more efficient for
different output
quantities. Why?
Figure 8-8 Quiz
• Figure 8-8 on page 204 illustrates an excellent
example of a firm’s Long-Run Average Total
Cost Curve.
• It consists of an unlimited number of plant
sizes, which might be appropriate depending
on the firms desired level of output.
Economies of Scale
• Economies of Scale explain the down sloping
part of the Long-Run ATC Curve.
• As the firm expands the size of its plants and
its total output in the long-run, it begins to
experience the economies of mass
production.
• You begin to use capital more efficiently,
specialize, share managerial resources, etc.
Factors of Economies of Scale
• Labour Specialization: Working on the same thing
can make people more proficient.
• Managerial Specialization: Managers and
supervisors can be utilized more efficiently.
• Efficient Capital: If a robot can produce 200,000
cars per year, 0-199,999 units is not as efficient.
• Other Factors: Research & development costs,
advertising, financing, et. Cetera can be spread
out.
Diseconomies of Scale
• Increases in the ATC of producing a product as
the firm expands in the long-run and becomes
too large.
• Main factor is difficulty controlling and
coordinating a firm’s operations.
• Communication problems, middle
management, bureaucracy, apathetic
employees, slow to change. Think of problems
you might see at a really large chain store.
Constant Returns to Scale
• This is when long-run average costs are not
changing.
• It is the output range between economies of
scale (declining ATC) and diseconomies of
scale (increasing ATC).
Minimum Efficient Scale
• The lowest level of output at which a firm can
minimize long-run average costs.
• Capital intensive industries realize minimum
efficient scales at very high levels of output.
• A Natural Monopoly exists in an industry
when the economies of scale are so great that
one producer would be the most efficient.
Economies and Diseconomies of Scale
• Utilize today’s reading and answer the
associated questions. To be handed in
tomorrow (Assignment # 10)
• The information will be on Wednesday’s Ch. 7
& 8 Test.