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Long-run costsLong-run costsLong-run costsLong-run costs
Firms in the long run can make Firms in the long run can make all the resource adjustment they all the resource adjustment they
desire. desire.
√ If the number of possible plant sizes is large, the long-run ATC creates a smooth curve.
√ As these changes are made, ATC changes and the set of possible plant sizes produces varying sets of short run cost curves.
Alternative long-run average cost curves
(a) Economies of scale(a) Economies of scale
OutputO
Cos
ts
LRACLRAC
As plant size increases a number of factors As plant size increases a number of factors will lead, for a time, to average costs declining.will lead, for a time, to average costs declining.
Labor specialization, managerial Labor specialization, managerial specialization, efficient capital and certain specialization, efficient capital and certain other kinds of cost like “start-up” and other kinds of cost like “start-up” and advertising reduce AC. advertising reduce AC.
OutputO
Cos
ts
LRACLRAC
(b)(b) Diseconomies of scale Diseconomies of scale
Alternative long-run average cost curves
√ √ As quantity grows larger, costs may rise As quantity grows larger, costs may rise due to the difficulty of efficiently due to the difficulty of efficiently controlling a firm’s operations as it controlling a firm’s operations as it becomes a large-scale producer. becomes a large-scale producer. Bureaucracy and red tape and causes Bureaucracy and red tape and causes AC to rise.AC to rise.
OutputO
Cos
ts
LRACLRAC
(c)(c) Constant costs Constant costs
Alternative long-run average cost curves
√ √ Constant Returns to Scale—long Constant Returns to Scale—long run-costs do not change over the run-costs do not change over the range of outputrange of output
A typical long-run average cost curve
OutputO
Cos
ts
LRACLRAC
OutputO
Cos
tsA typical long-run average cost curve
LRACLRACEconomiesof scale
Constantcosts
Diseconomiesof scale
Relationship between short-runRelationship between short-runand long-run and long-run ACAC curves curves
Relationship between short-runRelationship between short-runand long-run and long-run ACAC curves curves
Deriving long-run average cost curves: factories of fixed size
Cos
ts
OutputO
2 factories 3 factories 5 factories4 factories
SRAC1
1 factory
SRAC1
SRAC3SRAC2
SRAC4
SRAC5
LRAC
Cos
ts
OutputO
Deriving long-run average cost curves: factories of fixed size
Deriving a long-run average cost curve: choice of factory size
Cos
ts
OutputO
Examples of short-runaverage cost curves
LRAC
OutputO
Cos
ts
LRACLRAC
ExtensiveExtensiveeconomies ofeconomies of
scale existscale exist
OutputO
Cos
ts
LRACLRAC
Economiesof scale areEconomiesof scale arequickly exhaustedquickly exhausted
OutputO
Cos
ts
LRACLRAC
Economies of scale areEconomies of scale areconstant over large range of constant over large range of
outputoutput
