Lecture Element of economics - Chapter 7: Long-run costs. The topics discussed in this chapter are: Production in the long run, short-run and long-run increases in output, alternative long-run average cost curves, long-run average costs, relationship between long-run and short-run average costs, long-run average cost curves in practice, decision making in different time periods.
Long-run Costs • Production in the long run – meaning of the 'long run' – returns to scale • constant returns to scale • increasing returns to scale • decreasing returns to scale Short-run and long-run increases in output Short-run and long-run increases in output Short-run and long-run increases in output Short-run and long-run increases in output Long-run Costs • Production in the long run (cont.) – economies of scale • • • • • • • • • specialisation and the division of labour indivisibilities container principle greater efficiency of large machines by-products multi-stage production spreading overheads financial economies economies of scope – diseconomies of scale – external economies of scale – external diseconomies of scale Long-run Costs • Long-run average costs – assumptions behind the curve • factor prices are give • state of technology and factor quality are given • firms choose least-cost combination of factors – shape of the LRAC curve Costs Alternative long-run average cost curves Economies of Scale LRAC O Output Alternative long-run average cost curves Costs LRAC O Diseconomies of Scale Output Costs Alternative long-run average cost curves O Constant costs LRAC Output A typical long-run average cost curve Costs LRAC O Output Costs A typical long-run average cost curve O Economies of scale Constant costs Output Diseconomies of scale LRAC Long-run Costs • Long-run average costs – assumptions behind the curve • factor prices are give • state of technology and factor quality are given • firms choose least-cost combination of factors – shape of the LRAC curve – a typical LRAC curve – long-run average and marginal cost curves Costs Long-run average and marginal costs Economies of Scale LRAC LRMC O Output Long-run average and marginal costs Costs LRMC O Diseconomies of Scale Output LRAC Costs Long-run average and marginal costs O Constant costs LRAC = LRMC Output Long-run average and marginal costs Initial economies of scale, then diseconomies of scale LRAC Costs O LRMC Output Long-run Costs • Long-run average costs – assumptions behind the curve • factor prices are give • state of technology and factor quality are given • firms choose least-cost combination of factors – shape of the LRAC curve – a typical LRAC curve – long-run average and marginal cost curves • Relationship between long-run and shortrun average costs Long-run Costs • Long-run average costs – assumptions behind the curve • factor prices are give • state of technology and factor quality are given • firms choose least-cost combination of factors – shape of the LRAC curve – a typical LRAC curve – long-run average and marginal cost curves • Relationship between long-run and shortrun average costs – the envelope curve Deriving long-run average cost curves: factories of fixed size Costs SRAC1 SRAC SRAC3 factory factories factories4 factories O Output SRAC5 SRAC4 factories Deriving long-run average cost curves: factories of fixed size SRAC1 SRAC SRAC3 SRAC5 SRAC4 Costs LRAC O Output Costs Deriving a long-run average cost curve: choice of factory size Examples of shortrun average cost curves O Output Deriving a long-run average cost curve: choice of factory size Costs LRAC O Output Long-run Costs • Long-run average cost curves in practice – the evidence – minimum efficient plant size • Decision making in different time periods – very short run – short run – long run – very long run ...Short-run and long-run increases in output Short-run and long-run increases in output Short-run and long-run increases in output Short-run and long-run increases in output Long-run Costs •... Alternative long-run average cost curves Costs LRAC O Diseconomies of Scale Output Costs Alternative long-run average cost curves O Constant costs LRAC Output Long-run Costs • Long-run average costs. .. marginal costs O Constant costs LRAC = LRMC Output Long-run average and marginal costs Initial economies of scale, then diseconomies of scale LRAC Costs O LRMC Output Long-run Costs • Long-run average