LongRun Production Costs Everything is Variable Resource Adjustments

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.