1. Learning Objectives: Costs in the Long Run LO1: Distinguish between the short run and the long run LO2: Understand why medium-sized firms are sometimes just as efficient as big firms LO3: Understand why big firms sometimes enjoy great cost advantages LO4: Understand why firms can sometimes be too big CHAPTER 7 7-1© 2012 McGraw-Hill Ryerson Limited

2. Economies of Scale cost advantages achieved as a result of large-scale operations firms in industries characterized by assembly-line production of standardized products tend to experience declining long-run average cost these industries are often dominated by a few large firms 7-2© 2012 McGraw-Hill Ryerson Limited LO3

3. Economies of Scale Reasons for Economies of Scale 1.big plants are able to exploit specialization of labour on a far greater scale than small plants 2.large-scale production encourages management specialization 3.large scale production encourages machine specialization 4.big firms enjoy pecuniary economies of scale 7-3© 2012 McGraw-Hill Ryerson Limited LO3

4. Economies of Scale Pecuniary Economies of Scale Lower cost of borrowing Buying in bulk Selling in bulk Economies of scale in marketing and advertising 7-4© 2012 McGraw-Hill Ryerson Limited LO3

5. Economies of Scale 7-5© 2012 McGraw-Hill Ryerson Limited LO3

6. Self-Test 7-6© 2012 McGraw-Hill Ryerson Limited Indicate the presence of either constant returns to scale or increasing returns to scale in each set of data. LO3 Total CostOutput Set 1$ 30 000175 60 000375 Set 2450 000100 900 000200

7. Diseconomies of Scale bureaucratic inefficiencies in management that result in decreasing returns to scale Decreasing Returns to Scale the situation in which a firm’s output increases by a smaller percentage than its inputs 7-7© 2012 McGraw-Hill Ryerson Limited LO3

8. Self-Test 7-8© 2012 McGraw-Hill Ryerson Limited Decide in each of the following cases (A–D) whether constant returns, economies, or diseconomies of scale exist. LO3 Inputs 1Inputs 2Output 1Output 2 A612240480 B4692275650 C1827500800 D26054012402480