Economies of Scale Chapter 13 completion Cost Curves

  • Slides: 8
Download presentation
Economies of Scale Chapter 13 completion

Economies of Scale Chapter 13 completion

Cost Curves for a Typical Firm Note how MC hits both ATC & AVC

Cost Curves for a Typical Firm Note how MC hits both ATC & AVC at their minimum Costs • When MC < ATC => average total cost is falling $3. 00 • When MC > ATC => average total cost is rising 2. 50 MC 2. 00 ATC is U-shaped Due to high fixed costs 1. 50 ATC AVC 1. 00 AFC always declines: 0. 50 AFC 0 2 4 6 8 10 12 Fixed Costs spread over more output 14 Quantity of Output

Efficient Scale Production • Efficient scale- the quantity of output that minimizes ATC –

Efficient Scale Production • Efficient scale- the quantity of output that minimizes ATC – Production point in long run for all competitive firms – Where MC = ATC – Economic profit = 0 ------

Economies of Scale • Economies of scale– ATC falls as output increases – Allows

Economies of Scale • Economies of scale– ATC falls as output increases – Allows for specialization of workers – Leads to more productivity per worker • Diseconomies of scale– ATC rises as output increases – coordination problems eventually arise as firms grow in size • Constant returns to scale– ATC stays the same as output increases

Short Run vs. Long Run Costs • Costs depends on the time horizon considered

Short Run vs. Long Run Costs • Costs depends on the time horizon considered – In the short run, some costs are fixed – In the long run, all fixed costs become variable costs – Why: Firms have time to change both plant size & labor force • Therefore, long-run cost curves differ from short-run cost curves

Long Run ATC Average Total Cost LRATC $12, 000 10, 000 Economies of scale

Long Run ATC Average Total Cost LRATC $12, 000 10, 000 Economies of scale 0 Constant returns to scale 1, 000 1, 200 Diseconomies of scale Quantity of Cars per Day

Long Run ATC • LRATC is always below or on short run ATC curve

Long Run ATC • LRATC is always below or on short run ATC curve – you can be more efficient in long run!

Practice Test

Practice Test