Long-Run Production Costs
Introduced| English | Meaning |
|---|---|
| no fixed costs/nəʊ fɪkst kɒsts/ | The long-run condition that all inputs can be varied, so no production cost must remain fixed when output changes. |
| long-run average total cost/lɒŋ rʌn ˈævrɪdʒ ˈtəʊtl kɒst/ | The lowest average total cost attainable at each output when every input, including plant size, can be varied. |
| envelope/ˈenvələʊp/ | In cost analysis, a curve tracing the lowest attainable average cost at each output across the available plant sizes. |
| economies of scale/ɪˈkɒnəmiz ɒv skeɪl/ | Falls in average production cost as the scale of output increases. |
| diseconomies of scale/ˌdɪsɪˈkɒnəmiz ɒv skeɪl/ | Increases in average production cost as the scale of output grows. |
| constant returns to scale/ˈkɒnstənt rɪˈtɜːnz tə skeɪl/ | A production relationship in which multiplying every input by a given factor multiplies output by the same factor. |
| minimum efficient scale/ˈmɪnɪməm ɪˈfɪʃənt skeɪl/ | The smallest output that already reaches the lowest LRATC. |
| returns to scale/rɪˈtɜːnz tə skeɪl/ | How output changes when all inputs are increased in the same proportion. |
| diminishing marginal returns/dɪˈmɪnɪʃɪŋ ˈmɑːdʒɪnl rɪˈtɜːnz/ | The eventual decline in additional output from extra units of one input when other inputs are held constant. |
No factory is fixed forever
- Given enough time, a firm can rebuild itself at any size.
- A workshop can become a plant; a plant can become a mega-factory.
- With nothing fixed, costs behave in a whole new way.
- Welcome to the long run — where the firm chooses its own scale.
The long-run average cost curve
- In the long run there are no fixed costs 无固定成本 — every input can change.
- Each factory size has its own short-run ATC curve.
- The long-run average total cost 长期平均总成本 (LRATC) curve traces the lowest cost at each output.
- It hugs the bottom of all the short-run curves — an envelope 包络线 of them.
Because the LRATC hugs the bottom of all the short-run curves, it is called their ______.
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The LRATC envelope traces the lowest cost at each level of output.
Three regions of scale
- Economies of scale 规模经济: LRATC falls — bulk buying, specialised machines, division of labour.
- Constant returns to scale 规模报酬不变: LRATC is flat.
- Diseconomies of scale 规模不经济: LRATC rises — a giant firm is hard to manage.
- The minimum efficient scale 最小有效规模 is the smallest output that already reaches the lowest LRATC.
Economies or diseconomies?
As a firm grows, unit cost first falls (economies of scale), may stay flat (constant returns), then rises (diseconomies of scale).
A firm enjoys economies of scale when, as it grows:
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Economies of scale = a falling LRATC as the firm gets bigger.
The minimum efficient scale is:
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It is the smallest scale that already achieves the minimum cost per unit.
A car maker's LRATC is 20,000 at 100k cars and 14,000 at 300k cars. Between them the firm has:
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Cost per car falls from 20,000 to 14,000 as output rises — economies of scale.
Select all that can cause diseconomies of scale.
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Management and coordination problems raise unit cost; bulk buying lowers it (an economy).
Don't mix up two ideas
- Returns to scale (long run): change all inputs together — nothing is fixed.
- Diminishing marginal returns (short run): add one variable input while others stay fixed.
These sound alike but differ. Scale is a long-run idea (all inputs move); diminishing returns is a short-run idea (one input moves against a fixed one). Name the run first.
Returns to scale (long run) involves changing all inputs at once, while diminishing marginal returns (short run) adds one input against a fixed one.
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Scale is a long-run, all-inputs idea; diminishing returns is short-run, one-input.
The LRATC is the envelope of the short-run curves, with no fixed costs. It falls (economies of scale), flattens (constant returns), then rises (diseconomies of scale); its lowest output is the minimum efficient scale. Don't confuse long-run scale with short-run diminishing returns.
Write from a minimum efficient scale of 500
- Long-run average cost falls until 500 units and rises after that.
- Name the minimum efficient scale and the region before it.
Long-run average cost falls until 500 units and then rises. What is the minimum efficient scale, and what name fits the region before it?
Average cost is still falling on the way to 500, then it rises.
What is the minimum efficient scale?
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Long-run average cost reaches its lowest point at 500 units.