Download - Costs in the Long Run
Costs in the Long Costs in the Long RunRunImportant to note the differences Important to note the differences from the short runfrom the short run
Production in the Long Production in the Long runrunProduction in the Long Production in the Long runrun
All factors of production are variable in the All factors of production are variable in the
long runlong run
The scale of production:The scale of production:
returns to scale - output/input ratioreturns to scale - output/input ratio
constant returns to scale - output/input is constantconstant returns to scale - output/input is constant
increasing returns to scale - output/input is risingincreasing returns to scale - output/input is rising
decreasing returns to scale output/input is fallingdecreasing returns to scale output/input is falling
Economies of scaleEconomies of scale
““Economies of scale exist when the Economies of scale exist when the expansion of a firm or industry allows the expansion of a firm or industry allows the product to be produced at a lower unit cost product to be produced at a lower unit cost … Economies of scale are only possible if … Economies of scale are only possible if there is sufficient demand for the product, there is sufficient demand for the product, eg we would hardly expect to find eg we would hardly expect to find economies in the production of artificial economies in the production of artificial limbs, because there are simply not limbs, because there are simply not enough demanded!”enough demanded!”
Internal economies of Internal economies of scalescale
Come about from the Come about from the growth of the firm growth of the firm regardless of what is regardless of what is happening to other happening to other firmsfirms
Types of internal Types of internal economieseconomies
TechnicalTechnical Marketing/commercialMarketing/commercial PurchasingPurchasing Financial/Risk-bearingFinancial/Risk-bearing Organisational/HumanOrganisational/Human
Economies of scale - technicalEconomies of scale - technical specialisation & division of labourspecialisation & division of labour indivisibilitiesindivisibilities principle of multiplesprinciple of multiples container principlecontainer principle
Production in the Long Production in the Long runrunProduction in the Long Production in the Long runrun
Economies in actionEconomies in action
External economies of External economies of scalescale
Economies of concentration – specialist Economies of concentration – specialist supplierssuppliers
Economies of information – industries share Economies of information – industries share researchresearch
Economies of disintegration – large firms Economies of disintegration – large firms employ smaller firms to carry out processesemploy smaller firms to carry out processes
Diseconomies of scaleDiseconomies of scale InternalInternal
communicationcommunication ManagementManagement Higher labour costs – overmanning/overtimeHigher labour costs – overmanning/overtime
Production in the Long Production in the Long runrunProduction in the Long Production in the Long runrun
Diseconomies of scaleDiseconomies of scale ExternalExternal
Shortage of skilled labour and high wage costsShortage of skilled labour and high wage costs Shortage of raw materialsShortage of raw materials CongestionCongestion High rents and property costsHigh rents and property costs
Costs in the Long runCosts in the Long runCosts in the Long runCosts in the Long run
Long-run average costsLong-run average costs shape of the shape of the LRACLRAC curve curve
Alternative long-run average Alternative long-run average cost curvescost curves
Alternative long-run average Alternative long-run average cost curvescost curves
OutputO
Co
sts
(a)(a) Economies of scale Economies of scale
LRAC
OutputO
Co
sts
(b)(b) Diseconomies of scale Diseconomies of scale
LRAC
Alternative long-run average Alternative long-run average cost curvescost curves
Alternative long-run average Alternative long-run average cost curvescost curves
OutputO
Co
sts
(c)(c) Constant costs Constant costs
LRAC
Alternative long-run average Alternative long-run average cost curvescost curves
Alternative long-run average Alternative long-run average cost curvescost curves
A typical long-run average cost A typical long-run average cost curvecurve
A typical long-run average cost A typical long-run average cost curvecurve
OutputO
Co
sts
LRAC
OutputO
Co
sts
LRACEconomiesof scale
Constantcosts
Diseconomiesof scale
A typical long-run average cost A typical long-run average cost curvecurve
A typical long-run average cost A typical long-run average cost curvecurve
Deriving long-run average cost curves: Deriving long-run average cost curves: factories of fixed sizefactories of fixed sizeDeriving long-run average cost curves: Deriving long-run average cost curves: factories of fixed sizefactories of fixed size
SRAC1
Co
sts
OutputO
1 factory
Deriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed sizeDeriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed size
SRAC1
SRAC2
Co
sts
OutputO
2 factories
Deriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed sizeDeriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed size
SRAC1
SRAC3SRAC2
Co
sts
OutputO
3 factories
Deriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed sizeDeriving long-run average cost Deriving long-run average cost curves: factories of fixed sizecurves: factories of fixed size
SRAC1
SRAC3SRAC2
SRAC4
SRAC5
Co
sts
OutputO
5 factories
4 factories
Deriving a long-run average cost Deriving a long-run average cost curve: choice of factory sizecurve: choice of factory sizeDeriving a long-run average cost Deriving a long-run average cost curve: choice of factory sizecurve: choice of factory size
LRAC
Co
sts
OutputO
CostsCosts
A common topic in the exams!A common topic in the exams! Know the difference between Know the difference between
increasing/diminishing returns and increasing/diminishing returns and economies of scaleeconomies of scale
Difference between short run and long Difference between short run and long runrun
Test your knowledgeTest your knowledge
Are you a donkey or an elephant?Are you a donkey or an elephant?