Economies of Scale Chapter 13 completion

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 When MC > ATC => average total cost is rising $3.00 2.50 MC ATC AVC AFC ATC is U-shaped Due to high fixed costs 2.00 1.50 1.00 AFC always declines: Fixed Costs spread over more output 0.50 2 4 6 8 10 12 14 Quantity of Output

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

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

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