1. Mr. Bernstein Module 56: Long Run Costs November 2017
AP Economics
Mr. Bernstein
Module 56:
Long Run Costs
November 2017

2. AP Economics Mr. Bernstein
Long Run Costs versus Short Run Costs
In the Long Run, firms can change Fixed Costs
The LRATC is U-shaped
Fixed cost is chosen to
minimize ATC for each
level of output

3. AP Economics Mr. Bernstein
Long Run Costs versus Short Run Costs
Firms find themselves on Short Run cost curves corresponding to current level of fixed cost, and move along that curve when output is changed
But in reality many possible Short Run cost curves are possible, each with its own level of fixed cost
Over Long Run, firms adjust Fixed Costs based on expectations of future output
LRATC is equivalent to a series of snapshots of a firm, taken after adjustments to fixed costs

4. AP Economics Mr. Bernstein
Economies of Scale
LRATC is falling as output increases
Specialization
High Setup Costs spreading out
Bulk resource purchase discounts
Diseconomies of scale also exist
LRATC rises as output increases
Increasing costs of management and coordination in large, complex organizations

5. AP Economics Mr. Bernstein
Sunk costs
Money has been spent and cannot be recovered
Does not impact marginal values
Does not factor in decision-making