October 30, 2014 AP Economics 1.Return and Review Quiz 2.Lesson 3-3: LRATC.

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Presentation transcript:

October 30, 2014 AP Economics 1.Return and Review Quiz 2.Lesson 3-3: LRATC

Long Run ATC Curve All Cost curves so far have been in Short Run; that is plant capacity fixed, variable resources are changed to increase output. A firm’s Long Run ATC Curve shows the lowest ATC at which a firm can produce different levels of output when ALL INPUTS ARE VARIABLE. It is derived from a set of a set of a firm’s SRATC curves. Note: If a firm wishes to increase output, eventually it has to upgrade plant size.

SRATC1 To produce 100 units, ATC =$ To produce 100 units, ATC =$6 SRATC2 SRATC3 To produce 100 units, ATC =$7 4 Plant1 has the lowest cost of producing 100 units: LRATC = $ Plant 1 has the lowest per unit cost up to Q 0 Q0Q0 Plant1 has the lowest cost of producing 200 units: LRATC = $2

SRATC1 To produce 300 units, the per unit cost using plant 1 is $ To produce 300 units, the per unit cost using plant 2 is $2 SRATC2 SRATC3 To produce 300 units, the per unit cost using plant 3 is $3 3 SRATC2 has the lowest cost of producing Plant 2 has the lowest per unit cost up to Q 1 Q1Q1

SRATC2 SRATC3 Q1Q1 Q0Q0 SRATC2 has the lowest cost between Q 0 and Q 1 LRATC SRATC1 SRATC3 has the lowest cost above Q 1 SRATC1 has the lowest cost between 0 units and Q 0 Long Run Cost Curve

LRATC The LRATC is a combination of SRATC curves Each point of the LRATC tells you the lowest cost of producing a given output level 3 different plant sizes

The larger the number of plant size options… The smoother the LRATC is

Economies and Diseconomies of Scale Q: Why does LRATC curve slope downward and then upward? Downward Part of LRACT: Economies of Scale (Increasing Returns to Scale): When more units of a good or a service can be produced on a larger scale with on average less input costs. Examples: Increased specialized labor, good management, efficient use of large quantities of capital, etc. Flat Part of LRATC: Constant Returns to Scale Benefits of expanding the Plant size eventually end. Upward Part of LRATC: Diseconomies of Scale (Decreasing Returns to Scale): Firms see an increase in average cost when output is increased. Examples: Large number of workers require more managers, Communication problems within large firms, Lack of control as firms get too large, etc.

Minimum Efficient Scale: the lowest point where the firm can produce such that its long run average costs are minimized: First point of constant return