1. Long Run Cost Curves

2. In the long run
A small plant that manufactures chairs will have its own short run cost curve
If a firm expands and replaces its small plant with a medium size plant, it’ll move from one short run curve to another
There is a different short run cost curve for each given quantity of fixed factor
At first, each additional plant will only lower the overall long term ATC 2

3. Firms can only vary employment and material to increase output
Short Run
Long Run
Firms can only vary employment and material to increase output
Firm can expand or build another factory to increase output 3

4. Quantity of Magazines per Week Long-Run Average Costs
Costs in the Long Run (b) Figure 4.8, page 99
Quantity of Magazines per Week
$ per Magazine
Range A
Range B
Range C
Long-Run Average Costs
ATC in short run with large factory
ATC in short run with small factory
ATC in short run with medium factory
AC1
AC4
Long-Run AC
AC2
AC3 4

5. Why might the AC cost curves move downwards between AC1 and AC2 (from previous slide)
Example: Suppose, for example, that Company X employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed Amigos The company then expands to a 10,000 square foot factory employing 2,000 workers producing 2 million Stuffed Amigos. Why might going from AC1 to AC 2 result in a lower production cost per unit?
Advertising cost can be spread amongst greater units
You can order inventory at larger quantities, reducing your manufacturing cost

6. Note: The law of marginal diminishing return does not apply in the long run because the fixed input is no longer fixed in the long term

7. Costs in the Long Run (a)
Long-run average cost is the minimum short-run average cost at every output
The long-run average cost curve is saucer-shaped because of various ranges of returns to scale
initial range of increasing returns to scale
middle range of constant returns to scale
final range of decreasing returns to scale 7

8. Quantity of Magazines per Week Long-Run Average Costs
Costs in the Long Run (b) Figure 4.8, page 99
Quantity of Magazines per Week
$ per Magazine
Range A
Range B
Range C
Long-Run Average Costs
ATC in short run with large factory
ATC in short run with small factory
ATC in short run with medium factory
AC1
AC4
Long-Run AC
AC2
AC3 8

9. T 4, Returns to Scale (a)
All inputs can be changed by the same proportion in the long run
increasing returns to scale means the % change in output > the % change in inputs
constant returns to scale means the % change in output = the % change in inputs
decreasing returns to scale means the % change in output < the % change in inputs 9

10. Economies of Scale
Economies of scale is also another term that refers to the same thing
Increasing returns to scale = Economies of scale
Decreasing returns to scale = Diseconomies of scale 10

11. Returns to Scale (b) Increasing returns to scale are caused by
the division of labor
working on fewer tasks allow workers to become proficient
specialized management
Managers can focus on developing and managing own department
Specialized Capital
Some machinery is only available to larger plants and is designed to produce mass number of units 11

12. Returns to Scale (b) Decreasing returns to scale are caused by
management difficulties
Having too many departments will result in coordination and communication issues
limited natural resources
More applicable to fishing and forestry industries where such natural resources are limited, even in the long run

13. The long run ATC curve shows the lowest average total cost at which any output level can be produced after the firm has had time to adjust its plant size
In real life, there can be unlimited number of short run ATC curves. Therefore the long run ATC curve is much smoother.